Team Southwest assists in the development and marketing of an unfinished shopping center utilizing its local knowledge and national reach.

Challenge

City National Bank had recently taken back an incomplete shopping center development of 28,533 square feet in a distressed market. Submarket vacancies exceeded 20% and included several unimproved properties in the area. The lender was a subsequent possessor of the note, after the first lender was taken over by the FDIC.

City National Bank engaged Sperry Van Ness/ Team Southwest to manage the completion of the construction and position the property for sale.

Action

Team Southwest assisted in securing a local contractor to complete the construction of the shopping center. They managed the improvements during the process and simultaneously created a targeted marketing plan focusing on, both public and private regional and national investors. Team Southwest strategically marketed this special asset without setting a specific market price. This creative approach resulted in securing seven offers. These offers established a market value for City National Bank to write down the existing note and identified an eventual buyer.

Results

The development of the shopping center was completed and the property was successfully sold at a 7% capitalization rate. The resulting price was well above the then going rates for similar properties. Through Sperry Van Ness / Team Southwest’s proactive, national marketing campaign a Boston-based buyer was ultimately secured.

Team Southwest assists in the marketing and sale of triple net leased property utilizing its local knowledge and national reach.

Challenge

A longtime client made the decision to sell a property leased to Circle K Corporation. The lease was a (NNN) triple net lease with only eight years remaining. With the limited time until expiration, financing was an issue and required a buyer who had all cash or one who had substantial equity. This significantly reduced the buyer pool.

Action

Our team created a targeted marketing plan focusing on private local and national investors.
We used our extensive investor and broker database and the Sperry Van Ness national marketing platform, along with exposing the property on all major web portals. In addition, we implemented an old fashioned targeted cold calling campaign.

Results

We generated interest from over 100 potential investors and spent considerable time weeding out those investors who were unwilling to meet the seller’s expectations. We eventually located a qualified local buyer who was confident they could replace the tenant, if necessary. As a result, we were able to meet the Seller’s expectations and the Buyer obtained an
acceptable return and a well-located property.

Albuquerque Benefits From Tech, Film Industries

Albuquerque has historically been sheltered from economic storms that dramatically affect our neighbors in the Southwest. The real estate cycles here have consistently seen fewer highs and lows than markets such as Denver or Phoenix, making Albuquerque a relatively steady bet.

Although slow to feel the impacts of this recession, the city has still struggled with the same issues found nationwide. In September 2010, SunCal Cos.’ 57,000-acre development on Albuquerque’s west side went into foreclosure. The property was originally purchased in 2007 for $250 million from the Atrisco Land Grant heirs and sold at auction in September 2010 for $148 million.

By November 2010, unemployment rates were 8.8%, which is still better than the national unemployment rate of 9.6%. Government employment, which accounts for over 20% of the workforce in the greater metro area, has acted as a stabilizing force. However, even government jobs, the greater equalizer in this market, have been reduced as the city and state deal with lower revenues.

But there are many bright spots as well, including, Intel and Hewlett-Packard, both located in neighboring Rio Rancho, which employ upwards of 7,000 employees and contractors.

Newer to Albuquerque is the movie industry, which has been a steady presence here for the past decade. The growth of the industry has provided infrastructure, which generates opportunities for investment such as the newly constructed, massive state-of-the-art Albuquerque Studios. Local entrepreneurs and service companies support the industry.

Major commercial product types have all felt the effect of the recession, with apartments and retail faring better than other property sectors. Apartment occupancies have bounced back from the lows of 2008 with 95% occupancy and growing rents at the start of 2011.

Triple Net Lease Investments

The uncertainty of traditional investment classes and lack of a meaningful return have generated tremendous investor interest in net-leased, single-tenant real estate here in Albuquerque and across the nation. These properties, often referred to as NNN or STNL, are typically freestanding buildings leased to national tenants on a long-term lease of 10 to 25 years. The typical tenants are widely varied and most are household names such as AutoZone, McDonald’s, Walgreen’s, Dollar General and FedEx.

LEASE STRUCTURE

The appeal of investing in a NNN property includes predictable income, lower-risk income, capital preservation, tax deferment, hedge against inflation and pride of ownership. Honestly, who among us wouldn’t want to own the Starbuck’s store down the street that pays a great monthly rent like clockwork every month? Telling our friends that we owned it would be a bonus.

The NNN lease structure requires that the tenant pays rent monthly as well as pay the property taxes, property insurance, and property maintenance. The benefit of little or no management responsibilities cannot be understated, especially if the property is located in another city or state. Couple these benefits with tax advantages and the ability to defer capital gains through the use of a 1031 Exchange, and it is easy to see the appeal.

PROPERTY OFFERINGS

Property offerings are generally separated by the quality of the tenant and by the type of business they are in. The first category is retail and restaurants, including quick service, casual dining, drug stores, auto parts stores, dollar stores, and home improvement stores. The second category is industrial, including distribution and service centers. The third category is medical office buildings, such as dialysis centers and urgent care.

TENANT RATINGS

Tenants are rated as credit tenants or non-credit tenants by rating companies like Standard & Poor, Moody’s, or Fitch Group. The most desirable tenants are rated as institutional- grade investments such as CVS and Mc- Donald’s. Non-credit tenants are rated below investment grade or not rated by the agencies. These unrated tenants can be local, regional or national companies. Some very good tenants are not rated because they carry no debt. An example of an unrated tenant is Sprouts Farmers Market.

Major factors to consider prior to investing in a NNN leased property include income yield, also known as return on investment; income stability, or length of the lease and rental increases; income quality, drawn from the tenant strength, credit rating and financial statements; lease provisions, such as landlord responsibilities and tenant responsibilities; location factors, like traffic count, visibility, ease of access and complimentary neighboring businesses; demographics, such as population and income; and the nature of improvements including age, condition and conversion for another use.

THE DEVIL IS IN THE DETAILS

In closing, net-leased investment properties offer a solid avenue for stable income, wealth building, estate planning, and flexibility. These investments provide more control than the equities market and allow the ability to exchange management-intense real estate for a very low-effort investment. Remember that the devil is in the details and a qualified commercial real estate broker with specialized knowledge can greatly assist you on your journey.

The Tax Cuts and Jobs Act 2017 (TCJA) leaves the ability to defer gains on real estate intact through a 1031 Exchange

Despite the many changes in the tax law under TCJA, Section 1031 of the IRC Tax Code remained virtually unchanged for real estate gains. This valuable investment tool allows a property owner the ability to sell an investment or business property for a gain but defer tax on that gain and reinvest the entire amount in another property. This scenario can be repeated, and the increased value and tax savings re-invested.

There are very specific requirements for an exchange which can include a “‘deed for deed” swap with another property owner, a deferred exchange utilizing a Qualified Intermediary or a “Reverse Exchange” which allows the acquisition of a replacement property before disposing of your present property. As with all things involving the IRS, the devil is in the details and expert assistance is suggested. Time limits are critical but can allow up to 180 days to accomplish the exchange.

Limitations on 1031 Exchanges:

1. The property must be held for investment or business use.
2. In order to “not create a taxable event” the exchanger must not receive cash from a “sale”.
3. The exchange must be structured prior to close of escrow
4. If the replacement property has a lower value, generally the difference is taxable.