This post was written by our deal analyst Daniel Greenberg.
Daniel has looked at hundreds of 1031 NNN deals over the last few weeks and has some good insights into the evaluation of these two deals as 1031 NNN investments.
Brand New Advance Auto Parts | Chicago MSA | 14 - Year Lease
On the face of it this seems like a great 1031 NNN investment. It’s a brand new Advance Auto Parts in Aurora, IL. The location is on the corner of two heavily trafficked neighborhood streets and less than a mile from I-88 (76,000 VPD). The site is an out parcel to a Wal-Mart, part of the Chicago MSA, and has 1-Mile Median Household Income of $92,196. The lease is for 14 years at $18.25/SF/YR and is backed by a corporate tenant with investment grade credit.
The property looks great, the location is good, and the tenant is strong, yet there are a few things red flags about this deal. The lease is only NN, which means that the landlord is responsible for the structure. The lease also states that if during the renewal options the tenant replaces the roof or HVAC, the landlord shall reimburse the tenant for the unamortized portion of tenant’s cost of such replacement at the expiration of the term. This means the landlord needs to be aware of potential issues with the buildings and can’t just sit back and collect rent. The other issue is that the lease doesn’t include any rent bumps until the renewal options, which aren’t until 2031. 2031 is many years in the future and rent bumps are needed to hedge against inflation and raising cap rates. A 14-year lease with no rent bumps gives little future financial protection to the owner.
Ultimately, any deal is a good deal at the right price; this deal is being offered at a 5.9% cap rate, which does offer investors somewhat of a discount. It all depends on what potential buyers are looking for. If the buyer wants an absolutely passive deal and hedge against inflation, then this deal is not for them.
Walgreens | Colorado Springs, CO | 10+ Yr Absolute NNN Lease
This is a strong NNN 1031 deal located in Colorado Springs, CO. The property has good site visibility (intersection has 53,000 VPD) and is located in a strong retail corridor with tenants like Wal-Mart (across the street), Lowe's Home Improvement, Guitar Center, PetSmart, etc. More than 252,881 people reside within a 5-mile radius of the site. The lease has 10+ years remaining and is absolute NNN, meaning the landlord has zero responsibilities. Walgreens is the nation's largest drugstore chain, is an investment grade tenant (S&P: BBB) and ranks #19 in the Fortune 500 (2016). The property is listed at a 6% cap ($492.98/SF), which offers potential buyers a suitable long-term return for a passive NNN investment.
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