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Newbies are Running Risks as They Flock to Triple-Net-Lease Assets

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Prior to the FRB’s June 15 rate hike, the largest since 1994, inexperienced investors had already entered the stock market and flocked to triple-net leased properties with tenants such as Dollar Tree, CVS Health and Sonic Drive-in. I did. Today, the trend is overkill as investors scrutinize their online lists to find single-tenant assets for sale.

Not surprisingly, HNWIs looking to divert $ 2 million from the stock market could be drawn to promises of a 5.5% or 6% tax return on triple-net investments. I have. These tenants boast investment grade bonds, so the risk seems low.

But when they compete to blockade these places, novice investors may be taking greater risks than they understand. Often, they buy properties based on the prominent selling points (price, credit, cap rate, rental level, length of lease) on their online list, and appropriate the characteristics of a very important location. Not rated.

Below are some tips for investors who want to evaluate the properties of triple nets like professionals.

Please note the vacancy of the tenant

Smart retail chains can close 5-10% of the least productive stores each year and make more aggressive cuts as part of their adaptive real estate strategy.

So how can investors avoid buying confused real estate when retailers’ rental renewal options emerge? The main clues are undesired positional characteristics (difficult entry and exit, poor visibility, slow vehicle traffic, etc.).

Losing a tenant is a serious business. Consider a scenario where a discount store opens a triple-net property for an inexperienced investor on a rural highway in Wisconsin. Unknown to investors, retailers were dissatisfied with the characteristics of several locations, such as the condition of surrounding buildings and homes, and the decline in trade area population and traffic.

Investors ask brokers 150 miles away to hit the pavement for alternative tenants, but the effort is at a loss. “That 10,000 square feet of space needs to be subdivided into smaller storefronts for moms and pop operators,” the broker suggests.

Investors are detained. Vacancy creates additional obligations buried in creditor contracts, as income flows are depleted and closed stores suffer from more roof leaks, frozen pipes and vandalism. Investors, on the other hand, need to carry out large-scale construction projects and find and trade multiple alternative tenants.

There are many other scenarios where tenant losses can result. For example, certain heavy traffic operators are known to pay stunning rents at end cap locations with drive-through lanes for self-contained or multi-tenant sites. What do you dislike? The problem is that many of these same chains are continually tinkering with real estate strategies. When they leave, investors often find it impossible to replace rent above those markets.

Along the same line, a 10,000-square-foot dollar store may be accessible in a small parking lot with about 30 spaces. However, when investors subdivide their currently available space, the relatively lack of parking can make moms and pop restaurants and other future alternatives creepy. Once again, the investor is stuck.

Only a few years ago, a bustling retail corridor around the northeast sold investment grade bonds and a dollar store with a remaining lease term of 15 years at a cap rate of 5%. Today, some dollar stores that have half the lease term left are sold for the same amount. This is a clear indication of the strong demand of investors. Local retail brokers are also seeing inexperienced investors get triple-net properties with less than five years left.

It is a mistake for newcomers to assume that tenants with an approaching lease renewal date will remain forever.

Focus on access

When local brokers visit the site on behalf of retailers and investors, immediate access tends to be at the top of their site assessment checklist.

If the single-tenant, triple-net leased property is at the corner of the traffic light and the customer can go right or left on both roads, then 10 out of 10 (I have 5 of these assets) Owns); all of them meet these criteria. )

If it is in the corner of a traffic light, its rating drops to 7, but people can only get in and out of the right on both sides.

Sites in the central block with dangerous winding lanes in the middle of the roadway are assigned a rating of 5 or 6. Shoppers, especially parents with children in the car, tend to hesitate to sit in the middle lane and try to turn left. Same as above about the misery left from property. If access is accompanied by this kind of “fear factor”, the property will suffer from reduced traffic and sales.

Worst scenario? A single-tenant asset on a split highway. Shoppers need to make a U-turn past the building to access. Ratings here range from 0 to 4 based on how much people have to drive before they can move the car.

Access to the area is also an important consideration. Look for properties near the intersection of at least two major interstate highways. Ideally, access to the highway has also been added. Paramus, NJ, one of the busiest retail areas in the United States, has Interstate Highways 80 and 287, State Highways 4 and 17, and Garden State Parkway.

But even within a busy hub like Paramus, some triple-net assets are more difficult to reach than others. Look for assets with easy access to complementary businesses at that commercial hub.

Real estate “Rosetta Stone”

The characteristics of the place not only help to evaluate a particular property, but also act as a kind of Rosetta Stone to understand everything around it, including potential causes of competition and cannibalism.

Earlier this year, Triple Net investors were trying to buy a new discount store in Florida’s bustling retail corridor. Investors began to change their minds when they learned that discount stores of the same brand were only a quarter mile away. “I don’t want to go here when there’s something else just below the block,” he said.

However, the old dollar store was buried behind a sleepy strip center, and the new store boasted “10 out of 10” corner access as described above. The substantial overlap of the two stores may seem like a sign of problematic cannibalism, but the location features poor visibility, traffic, and access, so old stores are chopping boards. I told another story that I was heading.

It all emphasizes the value of having the proverbial “10,000 hours” experience in retail real estate investment. Investing inexperienced, single-tenant triple-net investments seems like an easy, low-risk route to ROI. After all, listing services have thousands of assets readily available, and Google Maps, drone footage, and digital photos are like practical alternatives for visiting sites with local market experts. Looks like.

However, local retail real estate brokers are wary of internet-only transactions. They understand how the dominant tenants in this space work at the macro level, and their networks, personal experiences, and digital databases are near competition, trade area growth, and daytime. Competition provides inside information on factors such as population, traffic volume, cannibalism, and suggestions. Local brokers are also alive and breathing on the common site selection criteria of the most active and profitable operators in Triple Net Space. They can warn novice investors if real estate is at risk of darkening (because it does not comply with the latest standards of its retailers).

For example, RJBCO has created its own “Retail Location Evaluation Checklist” to assist clients (click). here Created from over 45 years on behalf of tenants looking for a new location (to get a copy).

In addition to location criteria, all investors need to consider the tenant’s reputation for the tenant’s promise in the NNN lease to “maintain the property in good repair and condition.” As a real estate owner, I had a situation where a particular chain wasn’t immediately addressing parking dents, greasy, and striped issues in multiple locations. Why do investors need to take this into account? Apart from the potential risk to visitors to the site, lenders require that such maintenance work be performed in a timely manner on the assets held as collateral. If this is not the case, it can have a negative economic impact on the real estate owner of the loan agreement.

None of the above observations are intended to discourage HNWIs from jumping into triple net lease investments. These transactions are popular for the following reasons: With a solid understanding of real estate risks and fundamentals, you will get healthy returns even if bubbles in other parts of the economy are bursting around.

Richard J. Brunelli He is the chairman of Old Bridge, based in New Jersey. RJ Brunelli & Co.. He has 50 years of experience in brokering and investing in retail real estate.He can reach at [email protected]..

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