Sale-leasebacks Investments


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Sale-leasebacks also supported overall growth, stockpiling equity and restructuring existing debt. Fortune 500 companies sold regional and national headquarters. Industrial conglomerates sold large distribution centers and portfolios of assets, respectively. Municipalities sought to lower deficits and balance budgets with government service assets by heading to the sale leaseback table.

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Sale-leasebacks Investments

  2. 2. SALE LEASEBACKS A Franchise Owner ParachuteB oth investor appetite and seller tenant necessity sparked an uptick of sale leaseback activity in 2010. A growing number of franchisees exercised this option for the firsttime since 2007 in addition to corporate-owned entities as aparachute to continue operations. Sale-leasebacks also sup- Let’s look at some of the franchise considerations and points of interest when contemplating a sale leaseback: » Ability for immediate cash infusion for operationsported overall growth, stockpiling equity and restructuring ex- » Use of equity for growth and expansionisting debt. Fortune 500 companies sold regional and nationalheadquarters. Industrial conglomerates sold large distribution » Continuity and uninterrupted operations and control of propertycenters and portfolios of assets, respectively. Municipalitiessought to lower deficits and balance budgets with government » Increase financial flexibility with creation of self fi-service assets by heading to the sale leaseback table. nancing and risk allocation » Loss of depreciation but gain lease payment deduc-Perhaps, the sector best realizing the value added with sale tions- proper structure of leaseleasebacks were single and multi- unit franchise owners. Real » Some seller tenants have depleted their depreciationestate could be a large portion of a franchisee’s equity invest- of property and thus there is less tangible and ac- ment and it may ultimately counting benefit for retaining property hinder their growth strategy.By: Teal Henderson With lenders not availing » Allows for restructuring, improving and simplifying balance sheets themselves as regularly to operators with smaller bal- » Bargaining opportunity for owner on lease options:ance sheets, then a monetization of the real estate currently in buybacks, renewals, go dark options, assignments etcplace could be an alternative solution option. » Preparation for a timed exit » Ability for multi unit owners to sell numerous assets asSince the economic downturn hit all sectors, many single and a portfolio and negate multiple transaction feesmulti unit franchise owners found themselves facing closuresand dissolution. Property ownership was no longer viable to » Lowering costs with rent payments possibly lower than mortgage paymentsthe current business plan. Sale leasebacks have given extend-ed life to the franchisees needing immediate capital, flexibilityand time to ride out the constriction or leap on sale pricedexpansion assets. There are numerous factors for franchise owners to consider with regard to transacting a sale leaseback, including the taxIn 2010, sale leasebacks were used frequently by franchise basis and possible penalties, corporate requirements and per-owners for alternative financing vehicles to fund new store sonal guaranties potentially necessary to close the deal. Prop-openings, maintain operation of current stores or invest in core er lease structuring is key to the longevity of the site as wellbusinesses. During peak market conditions from 2005 – 2007, as creating a salient asset for the ultimate NNN lease investor/franchise sale leasebacks were some of the most coveted as- buyer. sets for investors. However, during the downturn, some weremerely in a survival mode using equity to fund payroll andmaintain inventory. The ability to redeploy otherwise illiquidassets was and is key for many franchisee’s survival and for oth- Teal Henderson | Associateers a well-timed growth and expansion opportunity. Multi-unit thenderson@calkain.comowners eliminated property ownership to simplify accounting Phone: 813.282.6000and negate cross funding between stores with varied levels ofsales and success and ownership structures.CALKAIN COMPANIES, INC. NET LEASE ADVISOR First Quarter 2011
  3. 3. COLLISION COURSE:Cap and Interest RatesR ates…our world is full of them. With cap rates falling and inter- est rates rising, just how muchlower can the spread between thesetwo figures go before investors begin as fast as dollar store concepts are ex- panding. It should come as no surprise to those actively in search of top tier assets transactions to evaluate the driving factor pushing cap rates lower, the most apparent cause is the basic eco- nomic principle of supply and push back? Consumer confidence over the past year that cap rate com- On the demand side, there has been ahas crept back to relatively normal lev- pression is very real. According to rise in activity from private individu-els, lowering demand for safe-haven US Calkain’s 4th Quarter 2010 cap rate als searching for safe, passive invest- treasury report, net leased cap rates fell any- ments, while turmoil abroad has boost- bills and where from 50 to 125 basis points ed the flow of foreign capital into USBy: Patrick Nutt s u b s e - during 2010, depending on asset class assets. At the same time institutional quently and sector. Walgreens, often used as class investors, such as public and pri- driving an industry barometer to gauge the vate REIT’s, are raising funds as fast asthe yield in an inverse direction. Com- overall world of cap rates, were real- they can place them. Conversely, themercial real estate seems to have bot- izing average cap rates near 8% as of supply side of the equation has shrunktomed out. Cap rates for net lease in- the end of 2009. 2011 unfolds, trans- drastically. (As the recession sunk in,vestments stabilized in early 2010 and actions for new construction Wal- tenants commonly occupying theserapidly compressed over the following greens are now nearing the 7% mark, net leased assets contracted, closing12 months. As the economic world has with those assets in highly desirable underperforming stores and choos-changed over the past few years, rates geographic areas trading in the upperand their relationships have changed 6% cap rate range. As we dissect these Continued...CALKAIN COMPANIES, INC. NET LEASE ADVISOR First Quarter 2011
  4. 4. CALKAIN RESEARCHINDUST RY E X P E RT OPINION R EPORT M ichael Abrams is Pres- ident of Foulger Pratt Rockledge Medical Properties, LLC, in Rockville MD, a major medical office building development company in the metropolitan Washington DC area. AS A DEVELOPER, WHAT IS YOUR PREDICTION OF DEMAND FOR NEW MEDICAL CONDOMINIUMS IN THE WASHINGTON METRO AREA FOR Formerly, Mr. Abrams was a THE NEXT YEAR OR TWO? principal at Rockledge Realty ABRAMS: There are several conflicting forces impacting the medical condo market over the immediate and near term. On the positive front, certain fi- Partners. His twenty-year ca- nancing markets are becoming very attractive with practices able to borrow reer represents a cross section funds at about 5% and up to 90% of the project cost. This compares favorably with the cost to lease. Physician practices have also experienced generally of experience in real estate de- good conditions compared to other aspects of the economy which have suf- fered worse over the past few years. For example you don’t hear about large velopment, acquisition, finance layoffs by hospitals or physician groups. However, healthcare uncertainty - and management on both a while better since the passage of the 2010 healthcare bill - still permeates the decision making process for individual practitioners. principal and third party basis. Prior to forming Rockledge, he AS YOU KNOW, THERE ARE SIGNIFICANT SHIFTS IMPACTING MEDICAL DELIVERY SYSTEMS: OUTSOURCED MEDICAL SERVICES FROM HOSPI- served as founder and Presi- TALS, THE ADVANCING AGE OF THE BABY BOOMER GENERATION, THE dent of Carey Winston Realty RECENT HEALTHCARE LEGISLATION. CAN YOU COMMENT ON THE IM- PACT OF THESE TRENDS ON DEVELOPING MEDICAL BUILDINGS? Advisors, an asset management ABRAMS: We see a trend toward consolidating practice groups into larger and investment advisory sub- sizes and toward greater hospital employment of physicians. Both of these sidiary of the largest full service trends point away from the condo model as a vehicle for physician occupan- cy. Larger groups tend not to own in this manner and hospitals tend to own real estate company in Metro- entire buildings or lease space. We anticipate a greater orientation by health care systems to delivering services off campus in integrated settings where politan Washington, DC. a variety of medical services are provided in a more unified way rather than a building with a collection of unrelated physicians who may or may not be part of an integrated approach to care.CALKAIN COMPANIES, INC. NET LEASE ADVISOR First Quarter 2011
  5. 5. CALKAIN RESEARCHGIVEN THESE TRENDS, WHAT IS YOUR PREDICTION OF DE-MAND FOR NEW FREE-STANDING OUTPATIENT, URGENTCARE, AND MEDICAL CLINIC FACILITIES?ABRAMS: I think there will be a greater demand for these servicesbut they will not be isolated from other services such as primarycare imaging and other major practice types. Providers are beingincentivized to provide “accountable care organizations” whichare networks of hospitals and doctors with financial responsibilityfor their care. This will likely reshape how doctors and hospitalsphysically organize and where they will locate. We anticipate amuch more “retail” approach to the delivery of services under thismodel.  Winston Orzechowski | Research Director Phone: 703.787.4714 NOTABLE MEDICAL RECENT MEDICAL TRANSACTIONS CLOSING » GW Medical Faculty Associates looks ALL PEDIATRICS | LORTON, VA to add 450 doctors and buy 120,000 SF Price: $1,950,000 | Cap Rate: 7.67% Closed 4/2010 » Inova Health System to add 200 more AFFORDABLE CARE | AUSTIN, TX doctors Price: $1,400,000 | Cap Rate: 9.40% Closed 11/2010 » MedStar completes purchase of AFFORDABLE CARE | ANDERSON, SC Cardiology Associates Price: $720,000 | Cap Rate: 10.34% Closed 11/2010 » Kaiser Permanente buys vacant build- AFFORDABLE CARE | N. CHARLESTON, SC ings in Tysons Corner and Gaithersburg Price: $1,047,961 | Cap Rate: 9.40% Closed 2/2011CALKAIN COMPANIES, INC. NET LEASE ADVISOR First Quarter 2011
  6. 6. CASE STUDYT he strong investment sales market in the Washington DC region often makes it challenging for private investors to find affordable, passive investment properties. The niche sector of medical office condos are becoming a popular option for private investors and 1031/1033 exchange buyers seeking income-producing assets priced under $2M. Medical officecondos carry strong characteristics in terms of strength of tenant, lease structure and real estate fundamentals.Calkain was recently engaged by a medical office building developer to sell triple net-lease medical office condos in Fairfax County, VA.The successfully completed transaction benefited all parties.SITUATION: The original developer of a new condo-minium medical office building (MOB) recognized that he couldachieve maximum return on his investment by selling the individ-ually leased condos to private investors. The property was well-located in Lorton, VA and select units had recently been leased ona long-term, triple net (NNN) basis to stable tenants.OUTCOME: Calkain actively marketed the medical con-do property to our extensive database of triple net lease buyersand local investors. The property was introduced to purchaserswho understood the unique opportunity and characteristics ofmedical office condos. We highlighted the key attributes of theasset and were able to generate significant buyer interest.ANALYSIS: The property possessed what we considerto be key attributes of a core medical office investment condo:landlord-friendly NNN lease terms; a strong and stable tenant;and excellent real estate fundamentals. The condo was leased toa successful pediatricians group and the building is an integralpart of a community town center. Priced just under $2M, the assetwas attractive to multiple investors.RESULT: Calkain successfully identified an investor who hadan immediate 1031 requirement, and was capable of completingthe transaction in a timely fashion. The procured buyer was a local Jerry Burg | Managing Directorinvestor who knew the new development and appreciated the Phone: 703.787.4714reputation and strength of the pediatric practice tenanting thecondo. The seller achieved his objective of maximizing returns Andrew Fallon | Associateand the buyer satisfied a 1031 exchange by acquiring a stable in- afallon@calkain.comcome producing asset in the Washington DC metro area.  Phone: 703.787.4714CALKAIN COMPANIES, INC. NET LEASE ADVISOR First Quarter 2011
  7. 7. to remodel existing locations over expandinginto new sites.) According to research from the In- Calkain Companies, Inc.ternational Council of Shopping Centers, the center industry grew at its slowest pacein 40 years, expanding just 0.2% in comparison to2006 growth of 3%. While discount retailers suchas Dollar General continue to expand, other peren- Announces 2010 Award Winnersnial net lease tenants remain hesitant. Even Wal-greens lowered their 2011 openings to just 50% oftheir 2010 figure. All signs point towards a generallack of supply throughout 2011.While cap rates were falling, many speculated onthe potential negative ramifications as benchmark10-year treasury yield rose rapidly, gaining 75 basispoints in the last two months of 2010. As of earlyFebruary, that rate had increased another 25bps to3.65% - the highest level since early 2010 - howev-er we continue to remain at historical lows acrossthe board. Consider this, from July 1958 until thebeginning of the recession in 2008, there has onlybeen a two month period of time where the 10-year US Treasury provided a lower yield than today.In short, even with the recent rise in the yield on Left to Right: Andrew Fallon, David Sobelman, Jeff Bogart and Jonathan Hippthe 10-year note, over the past 50+ years that yieldhas been higher than where it stands today 98% ofthe time.There will always be a gap between yields for “riskfree” investments, such as the 10-year US Treasuryand alternative assets, such as net leased proper-ties. Efficient markets utilize this higher yield or C alkain Companies, Inc. is pleased to announce Jeff Bogart and Andrew Fallon as 2010 recipients of the prestigious “Top Producer” and “Rookie of the Year” awards, respec- tively. Both have made invaluable contributions to Calkain and represent the highest degree of professional merit.spread the price risk into an investment. Histori-cally, the risk premium for retail real estate assets Jeff Bogart, displaying grace and humility, commented “I needhovers around 410 basis points according to New to thank the entire Calkain team – without their help, thisYork based Real Capital Analytics. However, this wouldn’t be possible.” A first time winner, Bogart’s years ofspread has recently peaked at 540 basis points. As experience and commitment to success have helped elevatenet leased assets fall under a more conservative, Calkain to the position it enjoys today. Meanwhile, Fallon,risk averse classification, they observe a lower risk demonstrating wisdom beyond his years, stated “This awardpremium. Calkain’s Cap Rate report measures the represents a moment to savor but always build upon. Luckilycurrent spread for net leased assets, as of the end I am surrounded by the perfect people with which to do so”.of 2010, near 470 basis points. The risk premium In one year with Calkain, Andrew Fallon has consistently ex-has continued to shrink as cap rates continue to ceeded expectations and demonstrated an almost unequaledfall, pushing closer to the historical norm. Howev- drive towards, they remain a far cry from the 250 basis pointspread observed at the peak of the market in 2007, Jonathan Hipp, Calkain President and Chief Executive Officer,when 10 year US Treasury yields varied between added, “I am extremely happy for Jeff and Andrew. Their hard4.10% to 5.10% and average cap rates were in the work and dedication are the building blocks Calkain’s successlow to mid 7% range. stands upon today. Calkain has always prided itself on its great team and I can think of no better representatives of the foun-History has shown that the spread between cap dation we have laid. ” rates and the treasury yield should thin out, butI think as we’ve seen, that compression will mostlikely be the move of both rates. Average cap ratescontinue to compress due to general lack in sup- David Sobelman | Executive Vice Presidentply. Treasuries will level out somewhere in the 4% dsobelman@calkain.comrange as the economy begins to heal and move Phone: 813.282.6000forward. Patrick Nutt | Assistant Vice President Phone: 813.282.6000CALKAIN COMPANIES, INC. NET LEASE ADVISOR First Quarter 2011
  8. 8. At Calkain, our foresight and performance are leading the net lease investment industry. NNN Realty Advisors Urban Advisors Institutional Advisors Office/Industrial 1031/1033 Exchanges Asset Management COMPANIES, INC. Site Services Tax Strategy Sale Leaseback Program Equity Placement Research Division C A L K A I N C O M PA N I E S , I N C .CALKAIN COMPANIES, INC.N G T O N , D CN | T LLO R IS E A DM AS O L A N D | D E L A W A R E WASHI E F EA DA | VI RY R First Quarter 2011