2A —May 20 - June 16, 2022 — M id A tlantic Real Estate Journal
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M id A tlantic Real Estate Journal
M id A tlantic R eal E state J ournal Publisher, Conference Producer ..............Linda Christman AVP, Conference Producer ...........................Lea Christman Publisher ........................................................Joe Christman Conference Producer ...............................Jordaan Van Oort Editor/Graphic Artist ......................................Karen Vachon Contributing Columnist .....................David L. Church, CCIM Mid Atlantic R eal E state J ournal ~ Published Monthly Periodicals postage paid at Hingham, Massachusetts and additional mailing offices Postmaster send address change to: Mid Atlantic Real Estate Journal 117 HMS Halsted Dr., Hingham, MA 02043 USPS #22-358 | Vol. 34, Issue 5 Subscription rates: 1 year $99.00, 2 years $148.50, 3 years $247.50 & $4.00 single issue - plus postage REPORT AN ERROR IMMEDIATELY MARE Journal will not be responsible for more than one incorrect insertion Phone: 781-740-2900 www.marej.com
David L. Church, CCIM
Impact of Rising Interest Rates on NNN Values and Leveraged Returns nflation is raging at lev - els not seen in 40 years and interest rates for long term mortgages secured by income-producing proper - ties are following the curve. Investors have flocked to triple-net lease deals with credit tenants for the past five or ten years because they offer predictable income streams, long-term occupancies, and es - sentially no management. The reward for sellers has been ex - ceptionally low capitalization rates in the 4.00-4.25% range. I analyzed what I believe is a run-of-the-mill NNN deal and determined what the IRR and Equity Multiple were to an investor with a 10-year hold, the Base Case. The Base Case assumed a NNN tenant with a first-year rent of $250,000, underwrit - ten vacancy and management fees of 1.0% each, a 4.25% going-in cap rate with a ter - minal cap rate of 5%, a per - manent loan with a minimum I
DSCR of 1.25x, a mortgage rate of 3.75% Actual 360, and a total acquisition cost of $5,888,300*. The equity required was $2,729,300. The resultant Leveraged IRR and Leveraged Equity Multiples were 5.96% and 1.71x, respec - tively. If a seller demanded the same price for the property while the interest rate on permanent debt increased to 5.25%, returns to the investor are reduced substantially, the Static Price Case. The 1.25x DSC requirement reduced the permanent loan from $3,159,000 to $2,706,000, a reduction of $453,000. At
continued on page 18A If an equity investor de - manded the same IRR and Equity Multiple from the investment with the higher interest rate on permanent debt, the price of the property must decline, the Static Re - turn Case. To maintain the re - turns, the price of the property must decline by $661,000 from $5,765,000 to $5,104,000. This translates to an increase in the the same time, the equity requirement increased by $446,100 from $2,729,300 to $3,175,400. The increase in equity drove the IRR and Eq - uity Multiples down to 4.72% and 1.54x, respectively.
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