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Commercial real estate is increasingly coming into focus as a source of stress on the financial system, as hundreds of billions in loans in the sector are set to expire this year. There are $270B of commercial real estate loans maturing this year, around $80B of which is secured by office buildings, "which we’re extra concerned about," Trepp Managing Director Matt Anderson told MarketPlace this week. The complicating factor for the banks is that those office loans would typically be refinanced, per the program, but the low office occupancy rates means a greater number of properties are at risk of foreclosure. There have been multiple high-profile examples of office buildings going into default in the last year. Brookfield Asset Management defaulted on $750M in debt backing the office buildings at 777 South Figueroa St. in Downtown Los Angeles last month, while lenders took control of an 846K SF, Class-B office property in North Dallas after its owner, California-based investor manager Pimco, failed to pay its loan, The Wall Street Journal reported. Columbia Property Trust, which Pimco acquired in 2021, defaulted on more than $1.7B of debt backed by seven of its buildings in New York City, Boston, San Francisco and Jersey City. Related Cos. and BentallGreenOak, too, handed back the keys at two Long Island City office buildings last month. The is not a “financial disaster” but the sector is facing a “real mess” that will have widespread impacts, particularly in terms of tax bases, Adam Posen, president of the Peterson Institute for International Economics told Private Equity News. “I expect a major correction in commercial real estate is already under way,” he said, according to the publication, noting that nonbank lenders play a big part in real estate lending. Those lenders aren’t regulated in the same way as the banking sector, he noted, though it could be a better situation for the economy as a whole. “We haven’t seen smooth repricing or terribly transparent repricing of the mortgages and commercial real estate lending that is held in nonbank financial intermediaries.” Concern over the possibility of widespread CRE distress and its impact on regional banks has risen to the highest levels of federal government. Policymakers in the White House, Treasury Department and Federal Reserve have met to discuss the $20T industry and the risks it poses to the financial system, The Washington Post reports. https://www.bisnow.com/new-york/news/office/cre-is-a-real-mess-and-a-270b-problem-for-the-banks-118279

The International Franchise Association’s annual Economic Outlook Report, released Tuesday, provided data to support what’s been a common anecdotal story of late—franchise job and unit growth are outpacing 2019 levels. As uncertainty and instability continue to challenge retail, entrepreneurs are turning to the franchise model for its collective strengths and ability to leverage scale against external pressures. “Even with today’s economic headwinds, franchised businesses continue to grow, providing more good-paying jobs for their employees, and serving their local communities,” IFA president and CEO Matt Haller said in a statement. “After an historic year of growth during the post-pandemic recovery, the size of the franchise economy in 2023 will exceed pre-pandemic levels—demonstrating the power of the business model for prospective business owners when franchisors and franchisees work together.” Notably, service-based industries and quick-service restaurants are projected to witness higher growth than other sectors. The overall number of franchise establishments will increase by nearly 15,000 units in 2023, or 1.9 percent, to 805,000 units in the U.S. The quick-service franchise field is projected to grow 2.5 percent (as is “personal services”). This would bring the quick-serve space from 192,057 franchise units to 196,858. In 2020, the figure was 183,543. It was 188,402 the following year. Franchise employment in quick service should increase by 2.5 percent in 2023 to a total of about 3.9 million employees. In 2020, 2021, and 2022, that came in at 3.55 million, 3.73 million, and 3.8 million, respectively. Quick service accounts for 45.3 percent of all franchise employment in America (8.7 million). Full-service restaurants, 12.8 percent. “Despite a decline in consumer spending, [quick-service restaurants] will continue expanding, due to the strong demand for food deliveries,” the IFA said. “Moreover, during anticipated economic uncertainty, consumers are more likely to cut their ancillary spending such as eating out and prefer more economical options that [quick-serves] offer, including economical menu options and value meals.” Hence, why the sector’s franchise employment is expected to bump 3.5 percent. MORE: Check out last year's report Additionally, 2023 will see the overall quick-service industry output increase from $275 billion to $287 billion. “2022 was a challenging year for [quick-service restaurants] as they were impacted by supply constraints, labor shortages, and high inflation,” the IFA said. “Many brands fared well in the challenging environment as they focused on innovating and adapting to the changing preferences of their customers. These brands will continue to drive growth in their industry and attract both consumers and franchisees.” The full-service industry is expected to reach 33,240 franchise establishments, up from 32,879 (1.1 percent growth). Expansion has inched upward from 2022 (31,004) and 2021 (32,027). The sit-down arena is also predicted to employ 1.1 million people across its franchise holdings. Those numbers in the past three years have been 1.098 million, 1.06 million, and 923,097, respectively. Beyond outpacing pre-pandemic growth, this year’s data also shows restaurant recovery approaching full circle. Here’s how franchise establishments have tracked: 2018 Quick-service restaurants: 194,395 Full-service restaurants: 32,843 2019 Quick-service restaurants: 196,794 Full-service restaurants: 33,160 2020 Quick-service restaurants: 183,543 Full-service restaurants: 31,004 2021 Quick-service restaurants: 188,402 Full-service restaurants: 32,027 2022 (estimate) Quick-service restaurants: 192,057 Full-service restaurants: 32,879 2023 (projected) Quick-service restaurants: 196,858 Full-service restaurants: 33,240 So quick-service restaurants are now on track to surpass 2018 numbers this year (196,858 versus 194,395) and clip 2019 (196,858 versus 196,794). Full-serves are just about pacing to where they were pre-virus for 2018 (33,240 versus 32,843) and 2019 (33,240 versus 33,160). The output of quick-service restaurants is projected to increase 5.1 percent in 2023, the IFA added. Here’s how that’s progressed: 2018 Quick-service restaurants: $256.6 (billion) Full-service restaurants: $73 2019 Quick-service restaurants: $267.9 Full-service restaurants: $76.5 2020 Quick-service restaurants: $241 Full-service restaurants: $55.1 2021 Quick-service restaurants: $261.2 Full-service restaurants: $72.8 2022 (estimate) Quick-service restaurants: $275.7 Full-service restaurants: $76.5 2023 (projected): Quick-service restaurants: $289.6 Full-service restaurants: $78.2 Those projections are well ahead of 2019 for quick service and slightly over for full service. But the positive spin on the latter is it’s a massive uptick from the $55.1 result of 2020. Table-service franchises rebounded from 2020 into 2021 and have continued to climb, albeit at a slower rate than quick service. “The most common technology adopted by franchised businesses that have helped drive growth include: kiosk ordering and digital payments; artificial intelligence software to track inventory and forecast future sales; online training combined with on-site training programs; delivery apps and voice ordering technology; technology to gather customer insight for effective sales and marketing campaigns; AI to segment customers and increase the variety of loyalty programs; and better site selection using data and analytics that incorporate demographics, competition, customer behavior, and other critical information,” the IFA said. These innovations are bearing results, and are only likely to accelerate. According to the 2022 IFA/FRANdata Franchise Inflation Survey, 67 percent of quick-service restaurants expect cost impacts to worsen in 2023. Eighty-eight percent of respondents identifying labor challenges as major growth hurdle (more on that here). “To attract and retain talent, restaurants are looking to increase employee benefits and other incentives to increase overall job satisfaction,” the IFA said. “Because both industries are unable to otherwise lower their costs, they have introduced solutions like in-app loyalty programs, reducing portion size, and corresponding pricing adjustments amid the current economic climate.” Ninety percent of quick-service franchisees in that same survey said they experienced increased costs for inventory. But demand is humming along—per the National Restaurant Association’s State of the Industry Report, 84 percent of consumers prefer going out to eat with friends and family over cooking and cleaning at home. “With a rise in customers working from home, many look to [quick-service] and table/full-service restaurants as a way to get out of the house,” the IFA continued. “Similarly, the aftermath of COVID-19 has allowed restaurants to become a community meeting space for their customers. This is illustrated by the rise in ‘eatertainment,’ or food being served alongside a form of entertainment.” The IFA believes 2023’s growth will owe to an increase reliance on tech and focus on order online/pickup option, as well as a consumer base that continues to favor eating outside of the home. Here are some post-COVID trends the company feels will continue throughout 2023: Online food delivery with third-party delivery apps will continue to rise. In addition, many customers are now choosing pickup over delivery. Ghost kitchens that offer multi-restaurant selection will grow exponentially in the coming years. Brands will rely on automation and innovation to achieve operational efficiency. • Inflation and input cost increases will continue to pressure profit margins. Supply chain and labor-related costs will drive up menu prices. Employee hiring and retention issues will continue to challenge employers. Digital menus, such as QR codes and self-order kiosks, will be adopted industry wide. Restaurant layouts tailored solely to pickup orders will continue to emerge. Technological integrations will increase at all stages of the customer’s experience—from order placement to payment. As the restaurant industry continues to open new units, its biggest challenges will come in the form of inflation, expensive real estate, wage increases, and rising borrowing rates, the IFA added. “In many cases, the initial investment costs have increased by more than 30 percent,” it said. “The average time needed to launch new units has also increased due to high costs combined with a labor supply shortfall, which has added to higher interest costs. https://www.qsrmagazine.com/franchising/fast-food-franchising-experiencing-growth-boom

RV Parks make excellent investment properties and are in high demand, as evidenced by the demand, final cap rate and price achieved for this location. Interested in similar properties? Our team has a substantial pipeline of RV Parks available for purchase in 2023. Congrats to Eli Buck on the closing, and many thanks to a wonderful buyer and seller that made this transaction an absolute breeze!

For many months, the Federal Reserve has been saying that after the pandemic’s economic one-two punch (followed by three, four, and five), the agency could engineer a “soft landing.” The minutes from the Fed’s Federal Open Market Committee meeting in March finally gave up on the soft landing and recognized that people and companies would have to buckle their seatbelts. “For some time, the forecast for the U.S. economy prepared by the staff had featured subdued real GDP growth for this year and some softening in the labor market. Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years,” came the admission on page 6. “Real GDP growth in 2024 was projected to remain below the staff’s estimate of potential output growth, and then GDP growth in 2025 was expected to be above that of potential.” Although finally using the words publicly, reality seemed clear last month when the Fed released its most recent economic projections. It went as follows for real GDP: 0.4% in 2023, 1.2% in 2024, and 1.9% in 2025, with long-term 1.8%. Unemployment projections were 4.5% in 2023, 4.6% in 2024 and 2025, and keeping the long-term 4.0%. The same signs of slowdown came into personal consumption expenditures (PCE) inflation: 3.3% this year, 2.5% in 2024, and 2.1% in 2025. The changes from the December projections seems small, but arithmetic says the Fed expects a big slowdown to reach the median projections they’re looking for. Unemployment is 3.6% right now. To get 4.4%, you have to jump well over 5% for things to average out, unless it just happens to edge up without stepping over. Historically, that isn’t an outrageous number and used to be close to what people considered “normal,” but in comparison to recent times, it is a big shift. As for real GDP growth, Q4 of 2022 came in at 2.7%. The figures for the current quarter aren’t available—we’re not even past March—but, again, to get to the new figure, assuming Q1 hasn’t already crashed, and that seems unlikely, you probably need significant recessional levels in Q3 through Q4 to bring the average down sufficiently. Given how inflation quickly shot up and then slowly started to come down, leading to the lower-than-peak-but-still-high numbers now, the assumption of no overshoot with averages delivering the overall expectations isn’t a given. Those who might hope the Fed would consider a recession would be reason enough to stop interest rate increases should remember that the note about a recession came with the March quarter point hike in the federal funds rate.

We are pleased to bring this transaction to a close for our buyer who got a phenomenal deal. BELOW MARKET RENTS This property is currently leased far below market rental rates. Market rents are $19 - $23 per foot and this property is leased out at $13.25/ft. What this means is that the landlord has a TREMENDOUS upside in a renewal once the current lease expires. This renewal could yield another $80,000 in net rent for the landlord. PRICED BELOW MARKET The asking cap rate on this property was a 7.5% cap rate, which provided our client a significantly higher return than other comparable corporately guaranteed properties on the market. We feel this property could have sold closer to a 6% cap rate based on current market comparable sales from similar properties - especially because if is an absolute NNN lease. We know the market agreed because we competed for this and won against over 10 others because of our strong terms. PRICED BELOW REPLACEMENT VALUE At $176 per foot, you could not build this property new today for the same price that it is available for today with a 5-year NNN lease. Because of that, the property would be worth the current value even without the Aaron's lease. BRAND NEW LEASE / CORPORATE GUARANTEE Aaron's renewed the lease early demonstrating a strong commitment to the location. Early renewals generally indicate that the location is a strong performer and the tenant wants to make sure they can stay for a very long time. HIGH-GROWTH TRADE AREA The immediate area surrounding this property is experiencing over a 5% population growth per year boom. This equates to new homes and new customers. The area is also filled with many of your major retailers which draw in more customers. In addition to that, the area is also tremendously dense in terms of population and the property sees excellent traffic counts along McCart Ave. CONFIRMED TOP-PERFORMING STORE As part of our extensive diligence process, we met in person with on-site management who informed us that its location was a "consolidation store" meaning they had closed down a nearby store and now run that full book of business from this location. The manager let us know that this store is "one of the top in Texas" and he felt very good that they would be doing business here for a long time. HIGHLY ADAPTIVE BUILDING FOR FUTURE REUSE The building itself is perfectly suited to remain an Aaron's for a long time, be leased for a new tenant, or even chopped up into smaller suites as a way to increase rents for different tenants as a way to add value down the road. Either way, our client is getting a great return and holds all the cards for that future possibility #business#growth#property#future#sales

Investors are finding quick-service restaurants to be easily accessible as a niche market that has a price point significantly less than other single tenant net lease sectors, according to Avison Young’s Net Lease QSR Sector Report 2023. The average sale price is roughly $2.5 million. “At this price point, like many other single tenant net lease sectors, turbulent financial markets present less of a headwind, with most transactions being at a low enough price point that debt markets, and the present uncertainty that comes with those, are not a major consideration facing investors,” according to the report. The average observed cap rate on QSR transactions is about 62 basis points lower than the average single tenant net lease transaction average of 5.46%, sitting at about 4.84% currently. A true testament to the resilience of the QSR sector in times of economic uncertainty is that it’s not dependent on the rising 10-Year Treasury yield, which often correlates with cap rates, Avison Young stated. “Despite recent volatility, cap rates have compressed in the net lease arena,” according to the report. “Overall STNL and QSR cap rates seemed to stay in lockstep with each other, both seeing a slight compression in bases points from Q4 2022,” Avison Young said. The average cap rate over the past year for STNLs dropped 19 basis points from 5.65% to 5.46%. The average cap rate over the past year for QSRs dropped 14 basis points from 4.98% to 4.84%. The average cap rate per tenant in the past year was Burger King at 4.69%, Taco Bell at 4.69%, KFC at 4.70%, Starbucks at 4.72%, and Chick fil A at 3.80%. The average cap rate per term remaining in the past year were Taco Bell at 4.73% for less than 10 years and 4.64% for greater than 10 years as well as Burger King at 5.35% and 4.81%; KFC at 4.82% and 4.55%; Starbucks at 4.73% and 4.46%; Burger King at 5.35% and 4.81%; and Chick fil A at 3.66% and 3.92%. Overall Cap Rate Uptick for NNN Across the Board Brandon Beeson, principal at Edge Realty Partners, tells GlobeSt.com that he has seen an overall uptick in cap rates for NNN assets across the board, mainly due to the rapid rise in interest rates, which has cooled the overall investment sales market, reducing the number of transactions. “This slowdown in turn has reduced the amount of 1031 exchange money chasing single tenant assets in the market,” Beeson said. “Tax-deferred 1031 exchange money is a major driver in the overall NNN market causing the overall uptick in cap rates, however, well-located QSRs in strong and growing markets have been a bit sheltered from this” trend, he says. “Averaging over 50 basis points lower on the cap rate compared to other single tenant deals on the market, QSRs are showing an overall rise in mitigated risk in the last six months across the board, resulting in cap rates going up, just not as high or as quickly as other competing single tenant assets.” https://www.globest.com/2023/04/19/qsr-investments-are-less-expensive-risky-than-other-single-tenant-net-lease-deals/

While early education centers may have been overlooked by many high-net worth investors in the past, the pandemic has reinforced just how essential these centers are as they are meeting or even exceeding pre-COVID enrollment. Throughout the pandemic, many centers stayed open for the children of front-line workers. Additionally, early education facilities have proven vital for children to have face-to-face interaction to develop social skills. And ultimately, parents need childcare, making the sector necessary. While the early education space has not been as well-known as some other single-tenant net lease sectors, it has taken off over the last couple of years and has become much more recognized as a secure investment. What Has Changed? Historically, early education assets traded for higher cap rates on average than other single-tenant net lease retail properties like dollar stores, banks, and quick-service restaurants. In addition, most of the investors were institutional groups like publicly traded REITS. In general, high-net worth buyers typically had a harder time understanding the early education business model or didn’t recognize the company vs something like a quick-service restaurant or a pharmacy. Most high-net worth investors are one-time buyers who are in a tax-deferred exchanges and being such tend to stick with businesses they know. It is much easier to feel comfortable with a McDonald’s vs. a KinderCare if you don’t know who KinderCare is, despite KinderCare being one of the largest corporate operators in the early education space with over 1,500 locations. This concept is demonstrated by the spread between single-tenant retail cap rates vs. single-tenant early education cap rates. On average, there was an approximately 120 basis point spread between early education and single-tenant retail. However, that spread drastically dropped to about 87 basis points in 2022 – an all-time, record low. That is clear evidence that many more high-net worth investors are aggressively pursuing the early education space. This robust high-net worth investor demand has been driving down cap rates and making this spread thinner. Early education cap rates were historically low in 2022, at an average of 6.44 percent, which is 71 basis points lower than the previous year average of 7.15 percent (this data includes all credits, lease terms, and locations). Surging Demand In 2021 and 2022, more high-net worth investors began looking at all types of properties to fulfill their 1031 exchanges including early education, due to a lack of inventory, and some of the most aggressive cap rates ever experienced in the single-tenant net-leased sector. Over the last two years, we started seeing unprecedented demand for early education assets. We saw cap rates drop below 6 percent, which was previously unheard of in this space, and Spector set multiple cap rate records at this sub-6 percent level. Typically, these deals were in strong locations with long lease terms and strong credit. For example, Spector sold a portfolio of two early education centers for $14 million at a 5.75 cap and had multiple offers. Spector also sold a multi-building property for $10.8 million, also at a 5.75 cap, which also drew multiple bids and closed all cash. Sales Volume Up Transaction volume for the early education sector in 2022 exceeded $681 million, up approximately $54 million over 2021. Both 2021 and 2022 nearly doubled the sales volumes of previous years, again a strong indicator that morebuyers are attracted to the space. In 2022, there was a significant amount of investment from the “private client” or “high-net worth” sector, with approximately 89 percent of early education properties sold to this investor type. New listings are also on the rise. The increase in listings can be attributed to growing demand from investors, prompting more landlords to consider a sale, as well as more developers and operators looking to capitalize on the benefits of fully marketing a property. Outlook for 2023 This year unwavering investor demand will continue for early education properties. Buyers remain attracted to the sector’s e-commerce-resistant nature, high-quality real estate, long lease terms, and escalating demand. While the net-leased market has decelerated overall, it is by no means “dead.” While the market was in somewhat of a frenzy over the last couple of years, Spector anticipates strong sales volume again this year. Early education properties will continue to trade hands, as more 1031 buyers consider it a secure option with strong tenants. Like every other product type, however, today’s cap rates for early education assets are a bit of a moving target due to the rapidly changing economic environment and rising interest rates. While we may not be seeing as many deals trade in the sub-6 percent range that was seen in 2022, they remain extremely low relative to where the market was historically.

The current capital environment has tested the adaptability of many companies, as increasing interest rates have made the cost of capital rise uncomfortably. And while it’s unknown if recent events will calm the Federal Reserve’s zeal for future hikes, some companies are already availing themselves of an alternative capital source: the sale-leaseback. In fact, the transaction type matched its 2019 peak in Q4 of 2021, and there are signs it may not be slowing. Zachary Pasanen, managing director, investments at W. P. Carey, sees two big factors playing into the current interest in sale-leaseback: cheaper cost of capital and extra liquidity during tough times. A Corporate Alternative to Expensive Capital A major concern for corporate real estate holders is reducing the cost of capital for the next several years. As Pasanen notes, while they are “not quite desperate yet, the lag between interest rates and cap rates hadn’t caught up six months ago, but it’s starting to now. Prudent CFOs are looking to maximize capital and a long-term sale-leaseback is a great way to do that.” A sale-leaseback offers a “naturally accretive” alternative funding source. Holders of good, fungible, mission-critical real estate that are willing to sign a long-term lease with market or better rental increases built in will likely find that the underlying rate with which they can monetize those assets is inside the going long-term borrowing rate, according to Pasanen. The 50-year-old REIT’s predominant focus has been on warehousing, specialty manufacturing and food production, but it also delves into the education and retail sectors, the latter ranging from experiential sites to fitness-related products to auto repair locations. “By and large, we’ll look at anything as long as there’s criticality to it, meaning the stuff is made at our subject facilities or there’s a really strong location story to it or rent coverage or just a good real estate fundamental story,” Pasanen says. A Liquidity Solution for Tough Times Another consideration facing corporate real estate owners is having the capital on hand to weather the current economic instability. Rates again become a major problem, especially for companies or properties that might be lower on the credit spectrum. “For companies facing challenges that don’t have the ability to finance at attractive rates it’s a very simple calculus: if your borrowing costs go up that’s going to eat into your profit margins and there are only so many levers you can play with when operating a business,” Pasanen said. “They have to be laser-focused on how to get through this period of instability and unknowns.” Sale-leasebacks appeal here as well, allowing companies to put money back into their core competencies or pay down shorter-term debt that’s gotten more expensive, or perhaps even expand given that acquisition targets may have become cheaper. But Pasanen also notes that W. P. Carey’s sale-leaseback business is not just a capital product for troubled times, whether or not it’s on top of mind for companies and owners. “A sale-leaseback is a good tool in good times and a great tool in really uncertain times,” says Pasanen. https://www.globest.com/2023/03/27/its-sale-leasebacks-time-to-shine/

It used to be, before interest rates began their upward journey, that Matt Berres and Samer Khalil with the Newmark Net Lease Capital Markets team would receive between five to ten emails a week regarding 1031 deals in the $1 million to $5 million range. “Those mom-and-pop investors who buy long term stable properties were always the bread and butter of the business” says Matt Berres, vice chairman. “We could always count on having several of those in play at any given time,” he tells GlobeSt.com. That side of the business has shrunk significantly as transactions in net lease – indeed all of commercial real estate – has slowed. But as these particular emails dwindle down to one or two a week, Berres and Khalil are seeing an uptick in another sort of request for 1031 deals: Namely in the 10 million to $30 million range, sometimes as high as $50 million. These investors tend to come from one of two buckets: Those selling their downleg to capitalize on where the most aggressive capital is (i.e. where buyers still exist at attractive cap rates), or Those selling their downleg property as a way to reduce risk in their portfolio, such as a shorter lease term or a tenant that doesn’t have a good credit profile or long-term outlook. These participants are primarily private or family office investors, although Berres and Khalil have seen a few of these 1031 exchange requirements from institutional investors, and it is here where deals are getting done. This is what a typical deal in this range looks like. The seller is looking to offload a property that has some kind of inherent risk to it and thus a higher cap rate that is more likely to make financing viable in light of where interest rates are. There are many investors in the market with capital to deploy, but it’s just a matter of finding compelling risk-adjusted returns that justify taking the capital off the sidelines, Khalil explains. “None of these investors are willing to go into a negative leverage situation, so our clients are being very selective about what they put their capital into – it has to make sense given the overall returns that are achievable today while being congruent with their general portfolio criteria and long-term outlook.” However, not all deals are possible simply because of a property’s shortcomings. There still are deals underway where investors can sell a property at a lower cap rate and go exchange into something at a higher yield, typically by changing asset classes (i.e. from multifamily or industrial to retail). Khalil tells of one situation in which a private investor sold a multifamily property in Los Angeles for close to $20 million and is currently in a 1031 exchange with $17 million in equity and looking for a single- or multi-tenant triple net retail or industrial property outside of California. In this case, it didn’t sell because the property had some hair on it; rather they had a buyer at an attractive cap rate and they were confident they will be able to find an upleg property that offers a higher yield and is well suited to their investment objectives. Berres adds, “Another example we have found interesting is a client of ours who is selling their business after 50 years to a competitor and owns their real estate associated with the business. Given the attractive nature of net lease investments with long term cash flow from tenants with strong balance sheets and approaching retirement, they are now in a position to put approximately $20 million to work as they transition into a diversified portfolio at an attractive risk adjusted basis while enjoying their golden years.” “The clients in these scenarios are typically looking to achieve some leverage and given where financing and interest rates are currently, the minimum target cap rate is in the low to mid 6% range and we believe they will be able to find an attractive property that meets their criteria transacting with a seller who understands pricing has shifted, but the overall sale still matches up with their general portfolio goals and objectives,” Khalil says. https://www.globest.com/2023/03/09/here-is-where-the-net-deals-are-happening/

CHALLENGE In January of 2023, a former 1031 exchange client had another exchange requirement coming soon from the sale of farmland in West Texas. Previously, we exchanged his cattle ranch into a single-tenant net lease property that provided him with passive income. He initially intended to exchange into a recreational ranch in the hill country but was unable to identify a property. He called us with less than two weeks remaining in his 1031 exchange identification window and wanted to reinvest that equity into another STNL property like the one he had purchased previously. was looking to again place his equity into another income-producing property. With our strong relationship with him as a previous client and our market connections, we worked quickly to put together a deal that would not only clear the boot but also be something he would be satisfied with. ACTION We extensively examined the market looking at both on, and off-market properties that would fit his roughly $1,000,000 in remaining equity. Within 48 hours, we identified 12 on-market listings, four off-market new-development properties, and three privately owned off-market properties. We negotiated each opportunity aggressively and ultimately selected three properties that were suitable. One property had a lower cap rate with a 20-year corporately guaranteed lease, the next had 10 years of the lease term with 2% annual escalations, and one had five years remaining but had the highest cap rate and the tenant had just added a new roof and fully remodeled the store showing the tenant’s commitment to the location. RESULTS Knowing our client went to college in Stephenville, TX, we found the developer who was in the process of rehabbing one of the largest retail centers in town, and had just finished subdividing the land underneath the freestanding Family Dollar. Within three days, we had the property under contract below replacement value for the property due to our aggressive purchase terms. This exchange boosted his cash flow by $75,000 per year since his land was not producing any income. He now receives his rent via direct deposit on the first of every month like clockwork. He now spends more time traveling across the country to visit his three kids.

Background: In October 2022, a multifamily broker in the Austin Partners office reached out to Landan, a real estate investment firm, to assist a four-party family partnership in finding a solution for their aging properties. The siblings owned two assets and wanted to eliminate the management responsibilities while guaranteeing long-term passive cash flow as they approached their golden years. Challenge: The family partnership was exposed to nearly $1.7m in capital gains and depreciation recapture taxes due to the length of time they had owned these properties. They needed a solution that could protect their equity and maintain their cash flow. Action: Landan met with the siblings over multiple in-person and video conference calls to understand their goals and objectives. They identified a 1031 exchange as the logical solution to solve their problems. Landan identified, underwrote, vetted, and negotiated on over 80 individual properties to find a small subset of highly qualified properties that were suitable for each of the four partners and were the right dollar figure for the total $5.6m exchange. Results: Landan identified a 20-year corporately guaranteed Schlotzky's in Liberty Hill, Texas, for $1.8m and a $3.82m 15-year Mister Car Wash on one of the busiest roads in Round Rock, TX. The two properties had a blended cap rate return of 5.95%, which was a 20bps increase over what they sold the multifamily for. The family partnership was making more money with zero responsibilities. They avoided $1.7m in taxes, and now 100% of that equity is hard at work generating a higher return than ever before. Testimonials: The family partnership was grateful for Landan's assistance. One of the siblings said, "We sold a property one year ago and had to write a check to the government for $980k and lost our monthly income in the process. We thought we were going to have to hold onto this last property for the income, despite the fact that we were trying to retire. [Our broker] Jason introduced us to Landan who showed us how we could recreate and ultimately increase our income by trading that asset into the Schlotzsky's."

Introduction: In November 2022, a land broker approached Landan Dory, a real estate professional, with a client who was selling off a large tract of farmland. The landowner was looking to use the funds to purchase a ranch and minimize their tax exposure on the sale. Landan and his team got involved and introduced the landowner to net lease properties and how they could use a 1031 exchange to purchase a single-tenant, net-leased (STNL) property using the proceeds from the sale. This case study outlines how Landan's team helped the landowner minimize their tax exposure and invest in a profitable net lease property. Challenge: The landowner was facing a significant tax bill from the sale of their farmland, which they wanted to minimize. They also wanted to use the proceeds from the sale to purchase a ranch. Landan and his team had to find a way to help the landowner minimize their tax exposure while providing them with a viable investment opportunity. Action: Landan and his team began by educating the landowner about net lease properties and the benefits of a 1031 exchange. They showed the landowner how they could sell and roll 100% of their equity into a property that is corporately operated and generates cash flow from day one. The team then helped the landowner to identify potential net lease properties that would meet their investment objectives. After careful analysis, the team orchestrated an exchange and helped the landowner purchase a 15-year NNN Take 5 Oil property with a 6.5% cap rate return in Round Rock, Texas. The property is corporately operated, which means that the tenant is responsible for all property-related expenses, including taxes, insurance, and maintenance. This makes it a passive investment for the landowner. Results: By working with Landan and his team, the landowner was able to minimize their tax exposure and invest in a profitable net lease property. The team helped the landowner to identify a property with a 6.5% cap rate return, which is higher than the average for net lease properties. Round Rock, Texas, where the property is located, is one of the fastest-growing markets in the US, which suggests that the investment is well-positioned for growth. Furthermore, the landowner was able to achieve their objective of purchasing a ranch. The profits generated from the net lease property provided them with the funds they needed to purchase the ranch without having to worry about their tax exposure. Conclusion: This case study highlights how Landan and his team helped a landowner minimize their tax exposure and invest in a profitable net lease property. By leveraging a 1031 exchange, the landowner was able to roll their equity into a property that generates cash flow from day one, providing them with a passive investment opportunity. The team's careful analysis and selection of a property in a fast-growing market ensured that the landowner had a viable long-term investment. Overall, the case study showcases how a 1031 exchange can be an effective strategy for minimizing tax exposure and investing in a profitable net lease property.