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On July 27th, 2018

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The Golden Goose

STNL! - The Golden Goose By Kent Mommsen, CCIM, Ph.D.

Single Tenant Net Lease Investments (STNL). We affectionately refer to this very select pool of investors as “Coupon Clippers” waiting every month for their “mailbox money.” Simply put, STNL is the mother of all Commercial Real Estate investments. It’s also my passion. We review literally up to one hundred possible investments every day from all 50 states. The right STNL investment will be a workhorse – the golden goose – making money for you every day while you are out having fun. It can create stable income for years to come while keeping your capital intact. Ready to sell? No taxes due as long as we buy another one just like it. Property management? Nada. Is it a “trophy”? Wanna keep it? Fine. Your CCIM partner can help you restructure the debt to keep that excess equity working. As they say “Attitude is everything … pick a good one.” Same deal here. Pick a good one. Here is some jargon, acronyms, are a few guidelines.

PICK THE RIGHT BROKER.
Three bid rule applies. Interview three CCIM brokers and select the one with the most STNL experience who listens. This will be a long-term relationship and communication is the key to closing on the right STNL investment for your portfolio.

PICK THE RIGHT BANKER.
Three bid rule applies. Start with your primary banking relationship. See what they have to offer and be clear about your plan to purchase an STNL investment. Your CCIM partner will assist with comparative shopping. Financing is the key to maximizing your investment. Non-recourse? Leverage? LTV? Rate? Term? Conduit? Amortization? Interest Only? Fixed? Floating? Lock? Prepayment penalty? Defeasance? Turnaround time? Required documentation? Required banking relationship? Debt after closing? Your CCIM partner will make sure that we avoid the land mines, and the goal post doesn’t move two days before closing. If the banker is unwilling to provide preliminary conditional terms for the STNL investment move on. Finally, make sure to negotiate with the top three lenders. It’s a very competitive business. Your CCIM partner knows what to do.

PICK THE RIGHT ATTORNEY.
Three bid rule applies. Hourly rate? Flat fee? Retainer? Contingency fee? Your CCIM partner can assist but can’t provide legal advice. You will need local counsel in the state where the STNL investment is located and a second final legal review from your Boise counsel is a good strategy. Make sure that your attorney specializes in commercial real estate, is experienced with STNL investments, listens, and communicates effectively. Rates range from $100-$700 per hour so check the budget and request an overall estimate for the assignment before you sign a contract or pay a retainer. A lawyer’s willingness to discuss fees is an important indicator of client service. Fees cover quite a range including $100-$200 for small towns, $200-$400 for major metropolitan areas, and $500-$700 for highly specialized expertise aka “The New York Attorney.”

DO YOUR OWN RESEARCH.
Ask questions. Assess the risk. Negotiate. What is the actual capitalization rate? Confirm the actual Net Operating Income (NOI) as per the lease and the seller’s deposit records. Is the cap rate above the current market cap for this asset class? Why?

READ THE OFFERING MEMORANDUM (OM).
Sign the Confidentiality Agreement (CA) and carefully review the Disclaimer, Executive Summary, Tenant Overview, Lease Abstract, Rent Schedule, Property Overview, Location Overview, Demographics, Photographs, Letter of Intent (LOI), and Broker Information. Ask questions.

STUDY THE CCIM PROFORMA.
Going in cap rate? Cash on cash return? Internal Rate of Return (IRR)? Projected cap rate upon disposition? Proforma assumptions for the holding period?

READ THE LEASE.
Authorized signature? Subsidiary? National credit tenant corporate guarantee? Landlord responsibilities (NN lease)? Annual audited financials required? Insurance coverage limits?

INVESTIGATE TITLE.
Split title transaction? Preliminary title report? Title expenses? Extended coverage? Title policy proforma with deleted exceptions?

TAX LIABILITY.
Accelerated depreciation? Cost segregation? Tax free 1031 exchange? Installment tax deferred tax strategy? IRR after taxes? Tax impact on total portfolio?

THIRD PARTY REPORTS.
Three bid rule applies. During due diligence review the Phase 1 Environmental Report, Census Report, Property Condition Report, MAI Appraisal, Preliminary Title Report, Financial Report, Segregated Tax Proposal, and the CCIM Proforma.

VISIT THE SITE.
Speak with all the relevant parties: owner, tenant, manager, developer, title officer, surveyor, court records officer, local brokers, civil engineers, environmental engineers, certificate of occupancy (CO) inspector, general contractor, CCIM partner, investor partners, and, most importantly, your better half.

READ THIS BOOK.
The Little Book of Triple Net Lease Investing Second Edition (2013) by Hipp, Jonathan and David Sobelman, with a chapter by Richard Murphy. $24.99. It’s worth every penny.

THE GOLDEN GOOSE.
STNL investments ain’t for the faint of heart. Do your research. Ask questions. Select your advisors carefully and trust them. Hire a third party CCIM for a second opinion. Sit back, enjoy your investment, clip those coupons. Check’s in the mail. Actually, it’s in your account these days transferred electronically on the date due. The golden goose! Smile and get a good night’s sleep as the DOW plunges 1,700 points (10 percent) as it does at least once a year. Kick that volatility to the curb.

 

 

Kent Mommsen CCIM, Ph.D. (Florida State University 1970) is a former professor at the University of Utah from 1970 to 1985 (tenured 1976). Currently a senior real estate broker at Cushman & Wakefield Pacific in Boise, he has been selling real estate for 40 years. Licensed in Idaho and Utah he brokers STNL investments in all fifty states. Contact him at kent.mommsen@comre.com or (801)201-5556.

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