Start to Finish... Ground Up Single Tenant NNN Lease Development

[Jay H.]

So I felt like this would be a good subject to journal, both for the input from the pros and as a loose guide for others venturing into this field of investment.

Although I have been involved in the purchase of existing NNN lease investments I have yet to get involved from the ground up, much less as the actual point man.

I will go ahead and ask for forgiveness ahead of time for any typos, misspellings, or grammatical disasters. I am not a writer, a poet, or a prude.

Chapter One " What was I thinking" January 2014

I started the process by assessing/evaluating which credit tenant I wanted to focus on, and settled with the Dollar type national credit tenants.

I then looked at markets within 90 miles of Tallahassee, and studied the footprint of the three major Dollar tenants looking for gaps in the foot print and assessing why there were gaps. Simultaneously, I studied the age of existing Dollars in an attempt to add to the gap study the need for potential relocation of old Dollar types to new free standing buildings. Eventually I had a list of target stores and gaps. This is when the real work began.

With my maps and list I began to eliminate potential relocation options for various reasons but mainly do to remaining term on the leases. My focus started to narrow to areas that were missing one of the four large players in the Dollar game. once I narrowed my target markets to "gap zones" I started searching those zones for the most attractive parcels of land which in my mind is a parcel with good ingress and egress, preferably a corner lot with a market high traffic count. whether they were actively for sale or not. I also remained mindful that I may need to assemble multiple parcels, always considering the fact that I may need to tear down existing structures.

Over the first three months I continually narrowed my list of target parcels continually assessing the potential for the relocation of an existing Dollar, or filling the gap between existing Dollars with a competitor.

I contacted owners, existing listing agents, past listing agents (in an effort to cut through the time and BS of identifying and contacting the owner). Now, when asked what I was interested in with each parcel, I always said sandwich shop, package store, or carwash; something that threw off the scent of a fresh idea.

Coming into early March and I have identified four sites that will work as a relocation or a new competitor, and have three under contract. With my contract I typically don't negotiate the price aggressively up front, I prefer to appease the sellers desire to met their individual pot of gold, and hold them to a lengthy due diligence period (120-180 days). I will revisit the price, if necessary, after the potential tenants have done their market feasibility study to assess their potential gross sales. From this study the tenants will determine the price per sqft the market will justify. I do have an idea of both market rents and how they associate with the land acquisition prior to this stage but I leave room for future negotiations. For the purposes of this writing I am going to focus on the site that has the most components to the redevelopment. Assemblage, and Demolitions of a old gas station "The Site"

Chapter Two "Presentation to Tenants"

Now that i have the parcels under contract, I start bouncing the opportunity of relocation to any aged tenants in the area, and present the options for new locations to competitors of current market tenants. My recommendation is to find the tenant rep for each target tenant and present a site sketch of the proposed layout to the prospective tenant. I personally go all out with this step, because I am just fluent enough with CAD to be dangerous. I provide traffic counts, site foot prints including parking, holding ponds, ingress egress and maybe two elevations ( building views from different angles). The tenant market evaluation has been a month long process, but BOOOOM finally produced interest from two tenants, one is a relocation the other is a new competitor. The new competitor actually fits The Site better than the relocation because it only requires 10,000 sqft.

The Projected Numbers:

Land	285,000
Development $65 Ft2	$650,000
Total	$935,000
Rental Rate NNN	10.00
Square Footage	10,000
Gross Revenue	$100,000.00
Value
7.5% Cap	$1,333,000
7.00%Cap	$1,428,571
6.5% Cap	$1,538,461
Cost of Sale:
R/E Commission	($85,714)
Closing Cost	($28,571)
Lease Commission	($50,000)
Net Proceeds	$1,264,286
Less Cost to Build	($935,000)
Net Profit	$329,286

[Joel Owens]

NNN saying it is roof and structure is the brokers/agents in that area being LAZY.

I see so many problems with marketed listings and misinformation all the time.

Dollar General is doing well with sales growth of 3% per quarter and so is Dollar Tree. Family Dollar has taken a bath recently declining 3 to 4% per quarter. They were losing sales due to poor site selection, not having quality merchandise, and running the right sales on loss leaders to get traffic in the stores.

About 2 to 3 years ago Dollar Stores made sense for purchasing. Most of my clients I tell to stay away from them now. They are just highly overvalued in my opinion. You used to get them at an 8 to 9 cap with rental increases in primary term. Now the dollar stores think they are the cat's meow of the NNN space. They are doing brand new double net 10 year lease with low crap caps in the 6's and no rent bumps in primary term. You have to put 25% down or more to get a loan on them. The buildings unless forced architectural building controls by the county or city are brick front and sheet metal sides and back.

The only plus side is they are cheap in purchase price. Most are in sub-standard locations so 2nd generation tenant once dark you will not get the same rents.

If you are going to do that take your money and go 10 to 15% down and just get an existing CVS or Walgreens in a much better location and the building is all concrete, brick. You can also go for an Auto Zone, NAPA, etc. which give rent bumps mostly in primary term and caps in 6's to 7's.

Be really careful on the lease you agree to as a developer. I see many crap leases where the developer has a hard time selling off later. Yes to a certain extent they dictate lease terms but you also have to push back to have a salable lease to the next buyer so you can move on to your next project.