14A— June 28 - July 11, 2013 — Mid Year Review — Mid Atlantic Real Estate Journal
www.marejournal.com
t riPLe n et P roPerties By Alan Fruitman, 1031tax.com NNN properties are HOT!
W
hen the economy is strong, demand for NNN (triple net)
fice, industrial and shopping centers often lose sleep when they have vacancy. Their leas- es are normally short-term and vacancy is a constant concern. Owners will instruct and pay their leasing agent to find a new tenant as fast as possible so their exposure to lost rental income is limited. Once the vacancy is filled, the owner hopes their new tenant will fulfill its lease obliga- tions. But what happens if the property remains vacant for an extended period of time? What happens if the new ten- ant can’t pay its bills and the
property owner is forced to evict them? These “what if” questions lead to significant exposure to lost revenue and expenses that will not be re- imbursed. Single tenant NNN proper- ties work best for conservative property owners who want to hedge against the risk of va- cancies, market fluctuations, property managers, leasing commissions, tax increases, insurance increases, tenant improvements, fixing toilets and all of the hassles associ- ated with owning traditional real estate. NNN property
owners crave consistency and predictability and are willing to forego short-term upside in exchange for secu- rity. NNN properties deliver secure and guaranteed cash- flow. Primary lease terms for NNN property are normally between 10 and 25 years, plus renewal options. Although risk is inherent in any investment, securing a high credit tenant with a long term lease enables a property owner to sleep comfortably. Many of the NNN properties for sale have a tenant with an investment grade credit rating
from Standard and Poor’s. The following is an abbreviated list of tenants with invest- ment grade credit: Pharmacies (Walgreens and CVS), Banks (Chase and Wells Fargo), Dol- lar Stores (Dollar General and Family Dollar), Restaurants (McDonald’s and Starbuck’s), Auto Parts (AutoZone and Advance Auto), Grocery Stores (Kroger and Safeway), Big Box (Wal-Mart and Kohl’s). Tenants of this nature select developers in target markets to construct prototype proper- ties on parcels that meet their strict demographic and archi- tectural criteria. In exchange for a property built and paid for by the developer, the ten- ant signs a long-term lease and takes responsibility for taxes, insurance, common area maintenance and most or all repairs throughout the lease term. The developer will typi- cally sell their property once construction is complete and the tenant opens for business. This sale provides liquidity for the developer to construct ad- ditional properties. Demand for NNN properties comes from individual cash buyers (domestic and inter- national), institutional buyers (REITs and Pension Funds) as well as 1031 exchange and 1033 exchange buyers. Cap rates for most NNN properties range between 5% and 8%. This re- turn looks especially attractive when compared to less than 0.5% from bank savings or ap- proximately 2% from a 10-year US treasury. The current market for NNN properties favors the seller in most cases. The majority of properly priced properties sell at or very close to full price. Bidding wars for properties with superior credit tenants or prime locations are common. For example, one of my buyers competed against 16 other full price offers for a McDonald’s he purchased last month. The seller’s broker advocated for my buyer because I had success- fully closed several properties with him in the past. Broker to broker relation- ships are the key to successful transactions and yield the best results for both buyer and sell- er. The NNN marketplace is fortunate to have many qual- ity brokers who respect and cooperate with each other. Alan Fruitman is presi- dent & managing broker of 1031tax.com. n
properties is high. When the economy is weak, de- m a n d f o r NNN prop- erties is of- ten higher. I n 2 0 1 3 , demand for NNN properties is extraordi- narily high. Owners of traditional real estate investments such as multi-tenant apartments, of- Alan Fruitman
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