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

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

Tallahassee, FL · Member since 2013 · 108 posts · 55 votes

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

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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
12y

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.

See this reply in the discussion

65 Replies

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  • Tallahassee, FL · Member since 2013 · 108 posts · 55 votes
    11y
  • Washington, DC · Member since 2012 · 40 posts · 13 votes
    11y

    Jay,

    This thread has been a great read, I've been a commercial and residential contractor for years but the commercial has always been high rise tenant improvement or repurposing/infill work as opposed to raw land development so there's plenty of new information here for me. I also appreciated the details of your negotiations with the chains and Joel Owen's commentary as well.

    Did you ever price out the difference between steel sided versus block for your building? Was stick framing ever brought up? When I worked in New England we never touched stick framed for commercial but here in the Washington, DC area I've seen a significant amount of national retail/bank construction on pad sites in strip malls be stick framed (usually appears to be balloon framed walls with 2x8's or engineerd 2x6's).

  • Investor · Chicago, IL · Member since 2009 · 566 posts · 274 votes
    11y

    @Jay H. 

    Any update for us?  It looks like you are making great progress!  

  • Wholesaler · New York, NY · Member since 2015 · 10 posts · 2 votes
    11y

    Great Post! 

    When you get the property under contract do you have some time of contingency so that if you are unable to identify a tenant you can back out? 

  • Tallahassee, FL · Member since 2013 · 108 posts · 55 votes
    11y
    Originally posted by @Eury Vargas:

    Great Post! 

    When you get the property under contract do you have some time of contingency so that if you are unable to identify a tenant you can back out? 

     Sorry for the delayed response. To answer your question, yes I get  a very long due diligence period. This is not only for the tenant identification, but also for me to have time to meet with growth management and understand my hurdles surrounding the municipality. 

    One thing to understand is I typically pay at or above (as is) market for a property. This is due to the fact that my intended use is highest and best. Example: I recently put in an offer on a group of parcels that had an "as is" value of $530,000 per acre. I knew the property owner had a relationship with a local agent but this property was not actively listed. I wrote a letter of intent at $575,000 per acre. Why? Because I knew the seller would call his agent and I didn't want the agent to squirl the deal. I said I know you have a relationship with so and so, so do myself and you a favor, before you tell him my price ask him what he feels the property should be listed for. Since I already knew the answer, you can imagin my delight when he returned the signed LOI.

    So yes, I get a long due diligence period, but I also reward the seller with full value. Remember it doesn't matter what you offer, because you are going to back into your number during due diligence. If the end doesn't justify the means, then you renegotiate or bail. 

  • Tallahassee, FL · Member since 2013 · 108 posts · 55 votes
    11y

    I'm still trying to figure out the best way to detail this project without hurting feelings. I googled NNN (something) and this post was on page one. So I'm a little gun shy.....

  • Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    11y
    Originally posted by @Jay H.:

    I'm still trying to figure out the best way to detail this project without hurting feelings. I googled NNN (something) and this post was on page one. So I'm a little gun shy.....

     The power of BiggerPockets. 

    You could post under the Pro forum where only Pro and Plus members can see and respond.  We might even be able to move this thread there it it's cool with you and Josh Dorkin. 

  • Tallahassee, FL · Member since 2013 · 108 posts · 55 votes
    11y

    @Jon Klaus 

    I would be ok with moving it or starting a new thread there.

  • Investor · Chicago, IL · Member since 2009 · 566 posts · 274 votes
    11y

    @Jay H. 

    Awesome progress so far!  Looking forward to hearing more details about the project.  

  • Rental Property Investor · Houston, TX · Member since 2013 · 233 posts · 39 votes
    8y

    @Jay H. - How are things 3 years later?

  • Rental Property Investor · Miami, FL · Member since 2015 · 52 posts · 3 votes
    8y

    @Jay H. I'd also like to know how things ended up. Did you move the convo to the Pro Forum?

    This is one of the best threads I've ever read on BP as it walks through a deal from conception to purchase over time with plenty of room for commentary and response. Well done.

  • Tallahassee, FL · Member since 2013 · 108 posts · 55 votes
    7y

    Really sorry for the delays in finishing this post. I wish I had more time and/or someone that could follow me around with a gift for the written word. I am a terrible writer but have a ton to say about this experience. Since my last post, we finished the subject project and added a Taco Bell. Next, we applied the same process to identify and develop a Bojangles location on Park Avenue, then an O'Reilly Auto Parts and Taco Bell in Crawfordville Florida, then a turnkey development/construction management for a 10,950 sqft Funeral Home in Tallahassee, then another Bojangles on Hwy 27 in Tallahassee. Currently, we are working on our first development north of Tallahassee in Georiga and a large 13-acre assembly of properties in Tallahassee that will include senior living. 

  • Tallahassee, FL · Member since 2013 · 108 posts · 55 votes
    7y

    I have learned a lot since Dollar Tree. Mostly, I learned that quality control is non-existent with most GC's. I personally spent way to much time inspecting projects on a daily basis. This drove me to obtain my General Contractors license. Our philosophy was simple, why pay a GC when I can't rely on them to deliver a flawless project. As we progressed and proved ourselves in investor circles, we were able to attract new money into the capital stack for each project and go from straight 50/50 splits with investors to a 10% on actual cash plus15% kicker on profit FIFO. 

  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    7y

    Hi Jay,

    Yeah most of the lenders want that forward tenant commitment before they give the money these days. You almost have to get the land for nothing so if the premium tenant doesn't happen you can make profit from the secondary tenants if you have to buy it and wait or get cheap extensions.

    The costs for those projects can get very expensive.  

    How much of a spread difference are you seeing for overall IRR on ground up development versus repurposing existing buildings?

    The GC's and contractor companies here are awesome. They throw this stuff up flawlessly although cost per sq ft has gone up due to demand. I have seen food restaurants go up in 60 days. 

  • Tallahassee, FL · Member since 2013 · 108 posts · 55 votes
    7y
    Originally posted by @Joel Owens:

    Hi Jay,

    How much of a spread difference are you seeing for overall IRR on ground up development versus repurposing existing buildings?

    We have only done ground up projects so far, so I wouldn't have an accurate project to compare. 

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