Robert Gamzeh

One big factor impacting the private-capital NNN commercial real estate market is the possible removal of IRS Code Section 1031, which allows NNN landlords to defer capital-gains taxes on the sale of a property by reinvesting the proceeds in a “like-kind” property within 6 months.  The exchanges are an important mechanism for the private-capital marketplace, largely the enclave of wealthy individuals, family offices and boutique private-equity firms seeking to generate cash flow and create inter-generational wealth.

The Biden Administration has proposed ending 1031 exchanges to help fund proposed child care and family-leave legislation. There also are rumors of increasing capital-gains taxes, which would hurt NNN property owners more but would still cut into private-capital profits.  Although this proposal doesn’t appear to completely eliminate the 1031 exchange, it has significant constraints, and most NNN property owners would not be able to take full advantage of the tax break.

The Biden 1031 proposal would treat the exchanges of NNN commercial property used in a trade or business (or investment) similarly to sales of property, resulting in fewer distortions. This revision could increase the progressive nature of the tax and raise revenue for the U.S. Treasury.  Note that this is just a proposal and may not ultimately translate into law.

At present time, owners of appreciated NNN commercial property used in a trade, business or held for investment can defer the capital gain on the exchange of the property for similar property.  As a result, the tax on the capital gain is deferred until a future recognition event, provided that certain conditions are not violated. The proposal would allow the deferral of capital gain up to the amount of $500,000 per taxpayer ($1.0 MM for married individuals filing a joint return) per year for real property exchanges that are “like-kind”. Any capital gains accruing from like-kind exchanges greater than $500,000 (or $1.0MM for married individuals filing a joint return) during a tax year would be recognized by the investor in the year the investor transfers the real property subject to the exchange. The current Biden proposal would likely be effective for 1031 exchanges completed in tax years beyond, Dec. 31, 2021.

Conventional market wisdom is such: if private-capital investors don’t have access to favorable tax treatments like the 1031 exchanges, they are less likely to sell properties in the future. While institutional investors typically focus on IRRs, private-capital investors can hold assets without considering a time horizon. NNN property owners whose cost of capital increases because of higher capital gains taxes likely will hold properties longer.  From a macro-economic perspective, recycling capital by exchanging properties, keeps prices lower and increases deal-flow and, tax revenues are more consistent, yet keeps market liquidity elevated.  This would not happen under current Biden proposal for 1031 exchanges greatly harming at least one-third of the $25 trillion commercial real estate market.

For a smooth and successful transaction with impeccable facilitation for your potential 1031 exchange, reach out to your trusted advisors and 1031 navigators led by Broker Robert Gamzeh at the Triple Net Investment Group.   (We ask our readers to call or write to their congressman and/or senator to vote against the Biden 1031 proposal moving forward in both chambers.)

Goodbye Fuddruckers, California Pizza Kitchen and Chuck E. Cheese! The casual dining industry, has felt the full impact of e-commerce as traditional brick-and-mortar retail. Full-service or casual dining restaurants are revising their business models to adapt to pandemic and post-pandemic trends.  COVID-19 has definitely exacerbated the problems that the weaker brands possess. The pandemic lockdown drives the softening in the casual dining sector which is currently priced at a discount, 50 b.p. discount to the overall NNN net lease market.  In 2020, national cap rates in the casual dining sector increased to 6.60%. This is a 30-basis point increase year over year, from 2019.  The growth in days-on-market, and cap rates have definitely turned bearish for future pricing. In Dec. 2019, 102 NNN triple net casual dining properties were leased to a basket of full-service tenants, average cap rate of 6.59% and 170 days-on-market. As of Dec. 20, 2020 there were 87 properties for sale leased to the comparable tenants with an average list cap rate of 6.72% and 197 days-on-market.

According to industry reports, when the coronavirus pandemic began, casual dining restaurants saw 62 percent less traffic compared to just a 29 percent decrease for fast food or QSR. As the pandemic continues, sales continue to fall for casual dining brands, even as dining rooms open.  As a result, many casual dining brands have set out to rapidly alter their brand to suit the pandemic era and millennials.

At casual dining restaurants, slim margins on food led companies to focus instead on selling more high-margin alcohol. Meanwhile, tech advances in mobile ordering, delivery, or customer loyalty programs drew millennial customers to fast-casual and fast food, QSR restaurants. Delivery services have made eating at home a breeze, and these e-commerce driven sales tend to favor QSR fast casual restaurants.

With a declining customer base, this eroding restaurant sector is poised for further decline. Industry reports note that in a bear case, the best-capitalized restauranteurs can exist for 3-7 months, tops. Some of the largest U.S. casual dining operators, have seen liquidity problems together with troubling performance. Locations without $5 to $7 million in sales do not have the margins to induce lenders or restaurant operators in the current market.  Further, the top 15 largest U.S. casual dining restaurant lenders have reduced their exposure by as much as 20%. Lenders still considering new deals now they seek deals with, more equity, and more stringent covenants.

Casual dining restaurants need to update their value offerings to address food that should be novel, healthy, and delivered fast. Casual dining investors need to distinguish the safe harbor concepts, typically those located in profitable markets, in great locations, and tenants working towards revamping their brand.  Casual dining brands with ongoing business models must take advantage of increased curbside services, speed of service and convenience.  Corporately guarantee leases or large franchisees will remain in strong demand among NNN investment property investors.

In 2021-25, casual dining restaurants should closely mimic that of fast food QSR, as many companies continue to incorporate delivery and novelty menu offerings. NNN triple net lease investors in casual dining will buy brands that address the pandemic’s restrictions well and provide customers with a state of the art, delivery and dining experience.

Per the National Retail Federation’s annual forecast retail sales could grow between 6.1 and 8.0% to more than $5.0 trillion in 2021 as vaccinations increase and the economy reopens.  E-commerce sales are included in this number and are expected to jump rapidly by 15 – 20% to a spike of $1.2 trillion.  According to recent reports analyzed by S&P, 20 major shopping center REITs that have filed reports for calendar 2020, had increased YOY rent collections from 87% to 93%, showing solid improvement in the net lease NNN retail market.  As retailers’ net leases become due for renewal, their term is shrinking, as net lease retailers grapple with unprecedented volatility. About 2.0 billion square feet of retail space will have triple net leases expire this year, and increasingly, landlords are looking to pop-ups as a favorite short-term NNN solution until the retail landscape settles.  Americans spent $800 billion during 2020 on e-commerce, up 30% from 2019, according to data published by the U.S. Census Bureau. That behavior translated to e-commerce accounting for 16% of total retail sales, compared to 12% in 2019. Categories with big spikes included gear for home improvements, groceries, games, toys, sporting goods and musical instruments, etc.

HOT

L Brands will continue to expand its Bath & Body Works chain, opening 49 U.S. stores in 2021.  L Brands is also shifting more Bath & Body Works stores to off-mall locations, where comps are double and operating costs are lower, per investor reports.

Payless is back in the brick-and-mortar business in North America. The discount footwear retailer will open the doors on March 1 to its first store since it filed for bankruptcy protection in 2019, and subsequently closed its 2,500 locations and e-commerce operations in North America. The opening follows the brand’s online relaunch this past summer and is the first of hundreds of stores expected to open during the next five years.

Sephora is going ahead with its largest store expansion plan in its 21-year history. The beauty giant will open more than 50 freestanding stores and 200 locations within Kohl’s stores this year. Sephora will begin to open the standalone stores this month, with locations in TX, TN, FL and CA.

Target plans to expand the Apple shop-in-shops by the end of the fall. Apple products are already sold in Target stores, but the dedicated shops would double the tech giant’s footprint in select stores and expand its offerings.

Planet Fitness, saw a 46% month-over-month increase in visits in January 2021 compared to December 2020, a decrease year-over-year but impressive numbers nonetheless. 

The International Franchise Association estimates more than 26,000 franchised locations will be added this year, an increasing number especially in rural locations, offsetting declines seen in 2020. Rural franchises employment is projected to grow by more than 8%.

NOT

Macy’s executives are making it clear that they are betting on e-commerce to help the department store chain recover from the pandemic. At its earnings report this morning, Macy’s reported that during its fourth quarter, same-store sales were down 17.1% year-over-year, while e-commerce sales were up 21%. Macy’s also managed to report a profit of $170 million, its first quarterly profit in a year.

After closing nearly 250 stores in 2021, Victoria’s Secret will close 30 to 50 more locations this year, parent company L Brands revealed in an investor presentation. 

Smaller malls were struggling even before COVID hit. But as the pandemic caused mandatory shutdowns, shoppers avoided indoor spaces. It should be no surprise that the percentage of all retail loans in special servicing has risen to 35%. Late payments and delinquencies are hitting 12%.

Call your favorite experts at the Triple Net Investment Group for solid, enduring advice on retail NNN investment properties.

Regarding NNN triple net properties, the market and the complexity in deals can present some intricacies that are very hard, without experience.   It is easier and cheaper to instead work with NNN triple net lease advisors who will navigate for and with you.  Here are 7 main reasons to avoid For Sale By Owner NNN properties:

1. Investors should note that the FSBO is trying to get the highest price for their property. Much better than an investor can, your advisor will negotiate a realistic price, make sure there are no unidentified costs and perform due diligence on the property to ensure it is the best investment for you.
2. When you’re looking at an NNN for sale by owner listing, investors have less financing options available typically.  Additionally, when you’re dealing directly with an owner on the sale, you’re likely going to have less room for negotiation. Even if you’re paying all in cash, you may not actually be getting the best deal available on the market.
3. Plus, regarding listings a majority of NNN property owners list with brokers who work in networks so that the property has greatest exposure to qualified buyers. Therefore, it is safe to say, using advisors, a triple net lease investor will have infinitely more choices than on their own. 
4. In triple net for sale by owner listings, the lease terms and terms of sale details are presented poorly at best. When you work with a trusted net lease advisor, they can guide you through the devil in the details with expertise and ensure the elimination of surprises that may be awaiting post-close. Added stress, time, and costly expenses can detract from NNN investor portfolio wealth and financial goals and negate long-term financial success.
5. Another reason to avoid FSBOs is that truly profitable, NNN lease properties sell fast and most, if not many, are never listed openly. Others are very complex and require extensive due diligence. Prospective developers, and new builds also are rarely openly advertised. To locate the right property requires an advisor who knows the market and is reputed in the NNN net lease market. This partnership with a known advisor lends a distinct advantage to NNN investors and maximizes their ROI.
6. When you work with a NNN advisor net lease investors have an expert negotiator on their side who is an expert and can help secure the very best terms on your triple net lease investment. Advisors know what cap rates mean to investors and can advise you on cost-efficient and quick, safer, deals than FSBO.
7. Partnering with a reputable NNN advisor costs the investor, nothing. The fee for services is built into the price of the property being purchased and does not change with the negotiation since it is a fixed percentage usually borne by the seller. So, a whole lot of expertise and risk management on a sizeable dollar transaction, for nothing. That is nothing to sneeze at!

Allow your expert advisors at the Triple Net Investment Group to impart you objective net lease advice, state of the art market education, critical NNN triple net lease investment knowledge, and advocacy with buyers or sellers, and help find an amazing NNN investment that fits your criteria. Call today.

With vaccine progress and the economy gradually reopening, triple net lease investors have steadily returned to the market, albeit with a focus on a smaller, not larger asset pool.  NNN Investors are paying attention to what essential, which implies big box, grocery, drug stores and home improvement.  Cap rates for this type of property hit a low in the final quarter of last year cap rates for single-tenant, big-box space fell to 6.8%, a 20-plus-bp drop, YOY.  Analysts say anecdotally that only the best is trading right now, and investors are shunning gyms, fitness and restaurants.  This market thins out, lacking owners who don’t want to sell them together with buyers who are being skittish of such NNN deals.

Essential-business models, in the NNN space have maintained strong financial positions, and as a result, there is a clear bifurcation in rent collection between non-essential and essential tenants.  Some report that rent collections among multitenant retail and mall properties ranged between 29% – 55%; compare this to 70-85% of essential-business tenants continued rent payments!

From Lowe’s and Kroger to Whole Foods or Sprouts, “essential” big box national retailers attracted most of the investment over the past 18 months. After an aberrant 6 months, transaction volume surged to over $17 billion by Dec 2020. This increase reflects more than 60% of the average $ transactions for 2018, 2019 and 2020.  Even as multitenant properties with strong grocery anchors, became a headache for lenders, sales for essential big box tenants have soared: witness: Target., an essential big-box retailer, reports revenue growth of more than 19% year over year, 2020.

Sales among single-tenant, essential NNN investments properties anchored by big box retailers and pharmacies have highlighted the change in the types of NNN deals that have begun trading since late 2020. Analysts report the preponderance of single-tenant, net-lease NNN sales because of net lease buyers’ growing appetite for quality assets.  As a result, these types of NNN big box essential investments, have demanded significant price premiums.

The grocery sector has been the winner during this pandemic, including Costco, Target, Kroger, Walmart, etc., and a close second, home improvement, Home Depot and Lowes etc.   In 2020, NNN properties with grocery tenants accounted for more than 32% of the market, up 19% from 2019. Tenant quality and financial resiliency will continue to be uppermost with NNN lease investors. In 2020, big box NNN net lease properties were priced 1% lower than their non-investment grade counterparts. However, opportunistic net lease investors should monitor the sector for non-credit big box NNN surprises! Cap rates have ranged from 5%-7.0% across the nation, with the West leading the way and the Mid-west at weakest.

Call the NNN big box experts at the Triple Net Investment Group for the best advice on the deal on your table. With decades of experience and hundreds of millions of dollars of properties successfully transacted for a repeat clientele, you will succeed fast and best for your NNN investment goals this year.

Single tenant NNN properties are specialized properties leased to investment-grade tenants using long-term triple net (NNN) leases. The NNN refers to the triple net lease cost structure, which puts the onus on the tenant to pay (in addition to the rent) insurance, maintenance and property taxes, on the net leased property.  However, these type of NNN investments have their peculiar risks.

Even if the tenant is investment grade, its holding company can set up a separate, subsidiary LLC with a similar name for the purpose of signing a NNN lease. Thus, if the tenant is an entity that has no assets, it shields even the biggest company from honoring a lease.

The more specialized a building is, the greater the amount the next tenant will expect the landlord to contribute in upfront tenant improvements. Typically, single tenant NNN net lease properties are designed and built to meet the requirements of a specific tenant. Re-leasing such a property to a different type of tenant can take a long time and cost a lot more than expected.

Further, single tenant triple net lease properties are either completely occupied, or completely vacant. With a single tenant, if the tenant’s holding company goes out of business or exits, the rent goes away and the NNN investor is left on the hook for the unpaid lease costs.

Landlords need plenty of time to plan single tenant NNN property tenant transition. Otherwise, they may be stuck with an unexpected and costly vacancy. Tenants that don’t wish to renew their lease should give plenty of notice since it is challenging and costly to find a long-term tenant.

Just because a national name is on the sign out front doesn’t mean that the company behind it is going to honor the rents. Even if the property is a “corporate store,” the lessee is typically a subsidiary LLC, and the parent company may not be guaranteeing rent.   NNN single tenant investors need to make sure that if a tenant vacates before the end of the lease, there is an entity on the hook with deep pockets to continue paying the rent through end of term.

Even if a NNN property is located in a high traffic, metro, investors need to pay attention to the location.  Single tenant deals are not location-agnostic propositions just because of an investment-grade tenant.   Plus, even if there is no shortage of suitable tenants to come, single tenant buildings are built to tenant specifics and thus not cheaply transformed.

The value of a single tenant NNN triple net investment property is keenly tied to changes in interest rates.  These properties are like bonds and as they mimic a series of fixed payments over a specified time-frame. On the flipside, just like a bond, when interest rates go up, the value of a single tenant NNN property weakens.  

Your friends and advisors at the Triple Net Investment Group have deep, multiple decades-long experience in consummating single tenant, long-term deals, successfully. Call us today and see how and why our clients for single tenant NNN properties keep returning.

A NNN net lease property is one in which the tenant/s is required to pay all, of the taxes, insurance, and maintenance costs for an investment property.

For most owners of NNN triple net leased investment properties, the safe harbor under Section 199A does not necessarily apply to NNN property leases. But there are provisions that could be an advantage for net lease investors. 

Section 199A, also referred to as the 20% Pass Through Deduction, allows taxpayers to take a deduction for up to 20% of their qualified income from certain rental businesses, business income from partnerships, S Corps, schedule C operations, etc.  In the initial phases of the deduction being implemented, taxpayers did not know whether a rental business qualified as a trade or business.  To clarify matters, Notice 2019-38 was released which identified a safe harbor method under which taxpayers may treat a rental real estate enterprise as a trade or business solely for purposes of Section 199A.

The section 199A safe harbor does not specifically apply to real estate investor/tax payers that own triple net lease properties. In addition, triple NNN net lease ownership does not automatically preclude a 199A deduction. Actually, a rental real estate business can still be treated as a trade or business for the purpose of section 199A if the enterprise otherwise meets the definition of trade or business under IRS Section 162.

If a NNN net lease triple net real estate business, its agents and subcontractors are regularly and continuously involved in the activity of the property, NNN net lease investors may be able to establish that it is a trade or business and is not being operated under a pure NNN lease term. Here is a good example: A NNN Landlord owns and operates commercial rental property in Falls Church, Virginia which is leased by 10 tenants. The Landlord maintains and repairs as needed keep all portions of common areas in good appearance and condition as well as structural upkeep. The Landlord also contracts vendors for the repair and maintenance of property equipment such as the HVAC, boiler, electrical circuits, etc., which serves building and common areas. The Landlord diligently issues Forms 1099 to the contractors for all contracted services.”

Thus, a NNN rental real estate operation may meet the Section 199A safe harbor as long as it meets the following guidelines:

• The taxpayer investor keeps records, including:  1) description of all services performed 2) hours of services performed, 3) who performed the services and 4) dates on which services are performed, plus
• Separate books and records are maintained for each rental operation (and/or the combined business),
• Minimum 250 hours of rental services are performed in the rental real estate business operation claiming such 199A deduction

Your expert advisors at the Triple Net Investment Group have consistently, thoroughly and successfully advised on complicated NNN net lease transactions with tax advantages. Call today, if you are unsure about your current NNN lease property or portfolio’s bedrock value strategies during this pandemic.

The trends of tech and e-commerce due to the pandemic, continue to reshape NNN Investing.  However, here are SIX niches of NNN net lease or triple net properties are and will be resilient through market cycles. Make note.

• DIY/Home Renovation

Home improvement stores saw a huge jump in foot traffic due to the spike in home sales nationally. For example, Home Depot reports a 270% jump with a 133% increase in online sales. Industry reports suggest home renovation has increased by over 63 percent in August 2020 compared to 2019. Lowe’s ecommerce division also reports a shocking 150 percent increase. 

• Grocers

Retail grocers have greatly benefited from being essential in this pandemic since lockdown measures encourage consumers to dine and work from home.  For example, Whole Foods is expanding by 32 new locations by the end of 2021.  All discount grocery retailers are seeing a lift in sales as consumers continue to buy increasing dollars of grocery essentials. LIDL USA is rapidly increasing the number of their small-store concepts, as are Walmart, Kroger, Whole Foods, Albertsons and Aldi.   

• Restaurant

Fast casual restaurants have responded by turning on dime to long-term consumer trends with a huge focus on convenience, delivery and healthy eating. As the industry consolidates around cost, trend and location, there will also be more and better, culled NNN triple net lease investment opportunities. For instance Bojangles, Subway, Jimmy Johns, and Five Guys clearly state that they expect fast casual brands such as theirs, to grab market share from QSR.

• Car Repair

Lowered incomes amongst many demographics including business, stay-at-home and work-from-home routines, are prompting more DIY maintenance and vehicle repair, rather than new vehicle purchase.   Car repair and service retailers are located in highly-trafficked retail areas, which provide convenience for businesses and consumers.  While customer preferences may be changing rapidly, this sector remains the backbone of the economy’s physical goods infrastructure.

• Pharmacy

In an oligopolistic market, a few players dominate this essential and highly resilient NNN net lease market given the undeniable effects of graying demographics of the US population.   Walgreens, CVS and the up and coming Amazon Online pharmacy. Now, pharmacies across the U.S. are also valid federal partners, to distribute free coronavirus vaccines. CVS is focusing on medical services through HealthHUBs and expanding and increasing offerings via MinuteClinic. Walgreens bought VillageMD, a national provider of primary care, and PWNHealth, another branded diagnostics and clinician network.  

• Discount/Dollar

Dollar stores have more locations combined than the country’s top six largest brick-and-mortar grocery and superstore retailers.  The prospects for dollar stores is only getting stronger as other retailers wither.   Dollar stores have a small-box model and most offer NNN triple net lease investors, corporate guaranteed leases with no management responsibility and have national brands with carefully selected, phenomenal locations. Dollar stores target low-income shoppers in rural areas desperate for retail options. In these rural areas, dollar stores lack competition and go where no other retailers will go. 

According to current industry reports, although U.S. auto sales declined nearly 30% from 2019, yet auto repair and parts retailers are thriving.  Auto part and auto service retailers both are greatly benefitting from the fact that car owners are spending more to extend their vehicle’s useful life versus a new purchase.  However, the business model for NNN net lease auto parts is being shaken up by increasing sales of alternative fuel vehicles. As government policies continue to weaken conventional fuel demand, auto parts retailers will consolidate within the industry. It is conceivable that there will be always a market for conventional fuel vehicles their service, but a thinning one.

Currently, Auto part retailers setup in tertiary markets with below-average income, foot traffic, and population and are popular with DIY and DIFM customers.  With the advent of AI and electric cars, auto service retailers are experiencing a spike in business at the expense of auto parts retailers.  Auto parts retails occupy very conventional buildings, a huge boon for current and medium-term NNN triple net lease landlords, for vacancy and transitions. On the other hand, auto service retail uses upto 10,000 s.f. buildings which are highly specialized for their hvac, electrical and build out.

Alternative fuel vehicle sales are on the increase as consumers and businesses continue to crave greater fuel efficiency fueled by environmental concerns and vehicles operating costs.  However, a complete transition to alternative fuel vehicles is decades away to say the least.  Of the approximately 168,000 gas stations in the United States less than 40 percent, or 66,000 gas stations, also have convenience store businesses. Fuel sales account for more than 60 percent of total sales, which means that consumers are primarily purchasing gas for their cars and not convenience goods such as coffee, cigarettes and food. Real estate is all about location. Repurposing gas stations will depend on so many factors, such as urban versus suburban; primary/secondary streets versus highway locations etc. What are the current uses of the adjacent properties? Most importantly, the success of gas station repositioning will depend on the creativity of the developer.

By 2030, it is estimated that there will be over 50 million electric vehicles sold by carmakers, and by 2035 there will be about 35 million electric vehicles on U.S. roads. Amazon recently ordered 200,000 electric delivery vans, and today, about 20% of the world’s buses are alternative fuel. California has even mandated that by 2032 all buses purchased by its mass transit agencies be zero-emission. Gas stations have been declining for decades — in the mid-90s there were more than 250,000 gas stations and by 2019 over 60,000 had closed, a 25% reduction. This decline is attributed to other factors that have nothing to do with the economic vitality of operating a gas station. However, as demand for fuel continues to decline as electric vehicles are sold to the masses, one can reasonably expect than 65% of gas stations will close by 2030, and by 2050 the gas station concept will only be found in phonebooks lining erstwhile payphone booths.

Presently, Auto service retailers rely on nearby stores for foot traffic but are typically found near big-boxes without a storefront, however auto part retailers exist in secondary markets where the rents are more affordable.  For NNN net lease triple net investors, both types of auto retailers currently offer corporate guarantees and are well known for upto 20 year leases. Most auto part leases stay flat for the first 7-10 years but auto service lease terms see rent escalations every 3-5 years, from 2.0% to 5.5%.  Car part retailers tenants such as Advance, AutoZone or O’Reilly often trade between the 5.00% to 5.65% cap whilst 10-17 -year auto service retailers like Jiffy Lube or Valvoline, Midas Muffler, etc, will trade for cap rates ranging from 5.50% to 5.75%.  However, lease terms, rent escalations, cap rates are bound to change negatively, as auto parts business models morph.  The NNN net lease auto service business looks to be more robust than auto parts for the long term, though.