Single Tenant Net Lease Tips and Strategies

[Music] welcome back to America's commercial real estate show I'm Michael ball this segments brought to you by red iq.com this is a new sponsor and they do so great service they track data from static property operating reports to transform it into actionable intelligence so check them out at red iq.com today we talk about single tenant net lease investment world and you know some people are concerned about the government shutdown some people are concerned about you know what we've had some turmoil in the stock market and people are turning to real estate these days is maybe a safe investment and for people who don't want to mess around with management of multi tenant big properties single tenant at least properties or a great property type to buy our guest in studio one here Nancy Miller today with bull Realty and Andrew zipper with Greenleaf triple net holdings and I like to ask you guys about I know some of these returns as you mentioned the previous segment you know you might get a 4% or 5% cap break which is your cash on cash return if you in your first year if you're buying these properties but how do you guys help when you're looking at maybe I want a little bit higher return what are some tricks to get a better return on these types of properties tricks yeah well number one you're looking at a lot of properties so I'm looking at probably hitting the Delete key and 100 properties a day and it's it's actually a little bit of a nuisance but most of the properties we see are the four or five and maybe some low six capped deals so number one it's look and so when we find the deal that's six and a half or seven cap we're getting the sevens we take a little bit harder look at it because if they're pricing it at a high six they could they're trying to be aggressive in their sale so we're looking at what the brokers advertising first and then after that we actually we have the conversation with the broker let's get the story and then we're always trying to target something in the sevens because the sevens will give us the distance between the cap rate and the interest rate because we do get debt on these deals we'll get a 65% loan on these deals usually that's the ideal sort of loan we've figured out we try to get a cap rate in the sevens and that's let us lets us pay our investors other certain tenants or categories that you look for that may be have a better return but you still feel safe with there are categories that do pay higher cap rates like a lot of auto parts stores I've seen higher cap rates but we're not doing auto part stores we're doing mostly restaurants and so what we've seen is that the restaurants with shorter leases will typically be higher cap rates or honestly our biggest our biggest find are usually this a restaurant that we we title as priced incorrectly and so if it's priced the broker didn't price that correctly doesn't do it a research they might have priced it a little bit too low and we don't it's not initially we yeah we share that information but that's the ideal situation so typically we do want to make sure that there is some type of value in the property and so the biggest value for the property is always that that business will continue its operations indefinitely yeah that's the into that in Nancy for investors or maybe trying to get a higher return Lee singleton at least properties are looking at properties with lower terms left and less years left a model and what should they do there there in those several strategies that I recommend one is to look at a quality tenant it could be a franchise or could be a corporate guaranteed tenant that might have four or five years left on the lease if the real estate location looks pretty good if the tenant has a history in that location if there are remaining options left on the lease and if there are rent increases and those option periods the risk is mitigated to some degree and you're going to buy get it at a higher cap rate another strategy is to look at a double versus a triple net because the landlord has a little bit of the burden on them and usually you'll reflect that with a maybe 50 basis point give or take improvement in cap rate if you do that so sort for listeners they may not be in the single tenant at least world a double net net versus a triple and a does that mean the landlord might be responsible for roof and parking lot their roof and structure depending in today Oh an O'Reilly who's a fabulous double net tenant your responsibility is structure and roof and the roof usually comes with a 20 year lease so yeah yeah excuse me warranty so if you get that in the early years or even later on you've got plenty of warranty time left on that row do they maintain on that particular tenant maintained their parking lot themselves it depends on the tenant sometimes they do sometimes they don't so some other ideas for getting higher returns on these I would say that if if you're not looking to buy something on main and main if you're looking if you will consider something in a secondary or tertiary environment a dollar store for example people say Oh who's going to go out there well I can buy that dollar store with the new 15 year triple net lease and a small town out in podunk for about a seven percent cap I can buy that same dollar store in a larger city for a six cap or six and a quarter cap so if I'm looking if I am cap rate sensitive I may look at the geography if I'm willing to take what I call the risk because in that small town if they go dark the population is smaller and the likelihood of repurposing is a higher risk factor for people yeah well let's talk about mistakes to avoid and you know single tenant in at least properties are somewhat simple there's one lease and maybe the tennis taking care of everything but what are some of the things that can be catches well we had a big gotcha in December of this year when we actually had a property under contract and we went through lawyers expenses we had we had a lot of due diligence money invested in it and during due diligence we had the store manager actually tell us oh yeah we were looking for a new site and so that was a that was great that we found out at that point in time but little nuances of of information during due diligence is very important so you know do your due diligence is the number one rule that we always have in you know if you don't that could be a cost it could be a costly mistake in the future because in five years when that short term lease expires the the tenant it could be a somebody relocating in a clay could relocate across the street so you have a dark location with very little reuse because it's a if it's a fast-food restaurant it's always been known as that fast-food restaurant so how do you make a McDonald's a chick-fil-a I mean it's it's it's hard it's hard yeah yeah and listeners realize a dark property like that means they're still paying the rent but they're not open and it makes you real nervous as an investor or lender when that happens right yes that's the triple net investors worst worst fear dark property there's no one there taking care of it yeah Nancy would have smiley gotchas well I there are two things that come to mind one is that if a property if a tenant has the right of first refusal if I'm going to be buying that property I want to be assured as soon as I can that the tenant is not going to exercise that right of reherce refusal because I'm gonna have spent good good money up front starting my third party reporting and doing all the things that I'm supposed to do to buy that property so usually there's a window of 7 or 10 days so you might put in your LOI or your purchase agreement that the due diligence period starts upon the waiver of the right of first refusal from that tenant and second thing that that I think is that using and I'm this is a self-serving comment but using a broker will allow someone who is trying to find or sell a property put them ahead of the game if I'm trying to find something the broker can find things off market for me that they might not otherwise find because of their contacts are working with developers as we often do and then also on the selling side we we just recently listed a sherwin-williams we we knew it was very aggressively priced we've had multiple offers nearly at full price and and we are under contract in a very short period of time otherwise that would be a very very hard thing to have that seller realize that level of a net to them if they tried to sell it themselves yeah the creased demand let's talk about the shutdown the turmoil in the in the stock market are there any of these tenants or categories of tenants that maybe people are a little more concerned about today in the single tenant in at least world the biggest story I know is I dine equity which is now dine brands and Applebees Applebees has been in the news for years suffering not doing so well and in 2018 they had a remarkable turnaround I think I read something this morning where they have 43 weeks of consecutive store sales increases and the the stock itself the parent company dine brands owns I hop and Applebee's and their stock started January 2018 at 55 and end of the year about in the mid 70s so that company is doing very well just basically on I hop and Applebee's what tenants are out there expanding today and that might be opportunities well I did a little homework before I knew you might ask me that question and the the big player of growth is the dollar store Dollar General opened over 200 stores this past year and family dollar as well about 70 stores other folks Burger King 57 stores 711s and Starbucks seemed to be the top ones but I I might also add that that these folks that are to the question about the the economy and what's happening with the shutdown I think that if we look back at Oh 8 no 9 what happened was that the consumer buys down they go from casual to fast-food they start finding ways to economize and their purchases will they buy things from Amazon toilet paper and so forth or while they still go to the grocery store what will they do to save save money so I think in the near term we're going to start to see that so your your budget retailers if you will your cue srs and even your auto parts people there probably that in the next couple quarters do very well that's my look get your thoughts on categories like drugstores health is my um I won't I won't touch anything anything he'll medical or drugs or drugs and not necessarily because I don't trust the actual business itself because the not to get political but the government changes the dynamics of that of that vertical with legislation and so you might have a property or like a like drug stores there's drug stores that are suffering and there's drug stores that are doing well and the drug stores that are suffering are the ones that don't have the big partnerships because of some government program that does XYZ so in our model we completely of I myself and at Greenleaf we just avoid anything that has to do with health health Pharma or even medical care anything no category I would I would say take a maybe a contrarian view to that from talking with my lender people the people that they lend to they love pharmacies they love your kidney dialysis your DeVito's which are very good rates by the way that's right they love that as well and I think as the baby boomers age and go on Medicare they have to choose a drug plan and one of the ways that they choose a drug plan is they have alliances with anthem with rite-aid CVS and so forth so it's actually I think in a cause and I don't like necessarily the drugstore sector that much because they're long leases often flat leases you know there's no upside there pinch there basically for a pension fund most of the time so I think that the drugstore world could benefit be a hot one and franchisees as we talked about when in the slow or an up economy a franchisor q SR is going to also be popular so long as their credit stays stays strong and the hub grub hubs of the world don't take too much business out of the site may get you quick comments on banks it's single tenant net lease units today seems like there's less banks but there's some new ones popping up that's right my visual on banks banks are my health is that's right coffee shops yeah coffee shops I've never seen a cap rate on a coffee shop above six of a six six cap so I just don't like the return a coffee shop is some guy who just sold a big piece of real estate he's going into retirement he just wants his 20 year lease and it takes him into retirement and it's his pension check and he doesn't need anything more than a 5% return or a 4% return on his money that's who's buying those deals all right listen if you will leave an audience with this what do you expect for the singleton at net lease market moving for as far as cap rates and civility and an interest from the vest we're fully expecting interest rates rise this year there was a little bump down but I still think there's gonna there's gonna be a rise and and I think there's gonna be there's always gonna be an adjustment between cap rate interest rate and buyers and sellers expectations and so this is going to be I think this is an adjustment year where cap rates are gonna have to go up because the days on the market is gonna go up and then if days on the markets going up the prices are going to go down so that's what I say and then my I might have to buy a seven and a half cap deal instead of a seven cap deal because my rate might be a half point higher too so that's what I see more 10:31 velocity of people who are aging and selling the apartments and so forth many clients are doing that they want to get into simpler investments and they realize that the cap rates on those investments are lower but they're willing to do it because it's a mailbox money it's very passive I see some of that and hopefully interest rates as they rise cap rates will come up to meet them a little bit and once we see a little bit rot more of a rise in cap rate it'll take several months behind the interest rate but we'll see more investors come in the market because they'd like to get a deal yeah well I agree and I think single tenant at least pretty velocity and interest is going to remain strong because I think if we are getting toward a recession at some point no one's saying it's close but if you're concerned about how long the cycles been a lot of people flock to safe investments right and single tenant nataly's properties the default rate special in the national credit tenants has just been incredibly low really so I think it's going to continue well Nancy Andrew thank you for all your information today appreciate you being on ok thanks for having me all right thanks for joining us around the country or around the world if you're watching or listening thank you and thank you for sharing and thank you for your comments please connect with us from your favorite social media site you find them all at commercial real estate show.com until next week be sure that you always lead learn and laugh and join us for America's commercial real estate show [Music]

Channel: America's Commercial Real Estate Show

Views: 7,811

Rating: 4.9448276 out of 5

Keywords: agent, akb media, america's commercial real estate show, broker, bull realty, commercial real estate, commercial real estate agent, commercial real estate show, commercial real estate training, cre show, forecast, guide, industrial, industry, investing, landlord, leasing, marketing, michael bull, multifamily, office, real estate, strategies, success, tenant, tips, training, video, youtube, youtube video, zoning, single tenant net lease

Id: 3ViJVV-fXNk

Length: 16min 59sec (1019 seconds)

Published: Fri Mar 01 2019