Triple Net, Single Tenant, National Credit, Long Corporate Lease Retail

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I’ve written plenty about triple net, in fact absolute net, single tenant, national credit, long corporate lease retail over the last few months, but what if the purchase is for a buyer under the gun of a 1031 upleg.  I’ve known buyers under a bunch of stress during this process

It’s actually a very good thing that it’s as difficult and stressful as it is because if it wasn’t, we’d have even more buyers, and buyers looking for the exact same thing you are, so that would drive prices up to the point that no one could make any money.  This is the free market and due to the natural law of supply and demand, it makes certain that no one does too well, but on the other hand, will give someone ample opportunity to lose big. 

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I’m always concerned that if they find a couple of properties that they really like early in the process, but want to wait the 45 days to indentify that by the time the 45 day identification period runs, the properties would be gone.  This is why I also look for some slightly less perfect properties with some acceptable compromises so that the buyer might have a shot at them if they wait to pull the trigger. 

This property type is as much of feeding frenzy as I’ve seen.  There several reasons for this

1. Weak dollar gives international buyers a terrific deal relative to currency valuations.
2. It’s estimated that there is around $2 trillion sitting on the sidelines looking for a place to go.
3. There is little new supply coming on-line due to the scarcity of construction financing
4. T-bill and munis are bringing returns in the 2 – 3% range and probably aren’t much safer, if as safe as some of the corporate backed leases we’re looking at.
5. The absolute net, single tenant, single parcel product is perfect for out of area owners.  True, there are triple net multi tenant opportunities where theoretically the tenants pay or reimburse every dime to the landlord and I say theoretically because reality gets in the way. The landlord/management company becomes arbitrator/ mediator for the cat fights between tenants.  True, the mutually agree upon leases say that CAM charges are divided up between tenants based on rentable square footage, but reality can be something slightly different.  

Here’s an example of a bit of reality regarding the last item:  let’s say that there are three tenants in a medical office building.  One tenant (the lab) opens at 6:00 AM, one medical practice opens at 8:00, and the third one at 9:00.  Let’s say that there’s a winter day with heavy wet snow falling.  The lot needs to be plowed every few hours.  Let’s say that we have 18 or 19 snow days that month.  The resultant snow removal bill is huge.  The NNN leases say full reimbursement to the landlord.  I can guarantee you that you’ll hear the tenants whining and complaining – why should they have to pay their portion for all the snow removals – after all, they don’t open until 9:00 and they don’t need the removal at 5:30am (before the lab opens).  And the lab is saying – well the lease says prorated by rentable square footage so the tenant who opens early is not about to pick up the other’s portions.  It can end up being this way about almost about everything.   From trash pickup to opening up clogged drains – the reimbursement is always a battle.   The big risk with single tenant is of course that if you lose the tenant, you lose all of your income.  Obviously, it’s important to pick your tenant carefully.

I like just what my buyers like, but for all the above reasons, so does most everyone else.  In fact if it’s the ‘perfect’ type of property and it’s been on the market for more than a few weeks, I know that there’s something wrong that I just haven’t found yet, but other who have looked earlier have or it would already be in contract.

I had a buyer late summer with the exact same situation.  They found three properties that looked perfect, but didn’t want to get started with LOIs until their 45 identification period had ended.  You know where this is going.  Well, on the 44^th day they were going to indentify.  I check once again to see if the properties were still available and 2 of the 3 were in contract after multiples offers and for well above asking, and the third was still in multiple offers on the 3^rd or 4^th round of offers and counter-offers so it was going to sell for well above asking. It’s really no different than at the height of the residential housing bubble that we had in California in 2005 and 2006.

It’s not as much true in the situation where the buyer is looking nationally than what it generally is for a more finite area, but the same could be said for using multiple commercial agents for your search.  In a more limited geographical area it would be much more true because:

1. If they know about each other then you may not get quite the attention from any of them because they know there will be multiple agents showing the buyer the same properties which can create confusion and some hard feelings when one knows that he showed the buyer the property and the buyer makes the offer through someone else.  And for the same reason very few of us will take a non exclusive listing. 
2. The seller is getting unwarranted attention with all the requests for information, which can make it more difficult for the buyer to negotiate a decent deal.
3. We all fish from pretty much the same pond so it’s very likely that we all will find the same properties.  

If you’re a buyer in the above circumstance and you’re feeling a lot of stress over it, you can be sure that you have plenty of company.   And all that company is the reason that it’s so stressful.