DaVita Dialysis Clinic, Austin, TX
Closing Date: August 23, 2019
Cap rate: 5.40%
From Solar Farm to DaVita Property +$3.4M in Assets
In February 2019, a California-based family, new to triple-net (NNN) lease investing, contacted Chris Schellin, President and Buyer’s Advisor, at Westwood Net Lease Advisors regarding the upcoming sale of their solar farm. Once this property sold, their goal was to utilize a 1031 exchange to purchase at least two NNN properties for the family Trust. Since they had never invested in a NNN property or utilized the 1031 exchange before, they recognized the need for guidance.
With Schellin’s help, they closed on their first property in August, a new DaVita Dialysis Clinic in Austin, Texas. Because Schellin leveraged his broker network to find this pre-construction property and used his negotiating skills to overcome multiple offers, the family Trust now earns stable monthly income from a premium net-lease property in a top American city.
What started as a $4 million 1031 exchange, or “property trade,” resulted in ownership of 2 NNN investment properties totaling $7.4 million, deferred capital gains taxes, and a significant stable monthly income with no landlord responsibilities or capital expenditures.
The Process: Prepared for 1031 Exchange Early & Extra Due Diligence
Educate: From February to May, Schellin spent time educating the buyers before they sold their other real estate. As with any new NNN investor, especially those utilizing the 1031 exchange, it was important to give them ample time to learn about the process, preview properties, and designate in writing the properties they intended to buy within the IRS’s 45-day window of selling their original property.
Schellin also explained the particulars of the 1031 exchange and other tax advantages and how those tax benefits could potentially free-up additional investment capital. Starting the process before the sale of their original property gave the buyers time to consider their options without feeling pressured.
Locate property: Next, Schellin searched for ideal investments and discovered this pre-construction DaVita with all the components of a stable, income-producing investment, including a prime location, new building, and a guaranteed, long-term lease with incremental rental increases. The buyers were very interested but wanted to fly to the site and see it with their own eyes.
Site visit: As the buyers were new to the process and this DaVita was in a unique setting, Schellin visited the site with them to help assess the property. In addition to Schellin’s property experience, he is also familiar with the Austin real estate market from his own investing experience, so he provided valuable local insight. The site proved ideal, so they went to the next step.
Extra due diligence: Since this DaVita was being built in a medical professional condo development, it required an extra level of due diligence to assess the lease and condo documents. Quite often, in a condo situation, condo rules require that the landlord is responsible for “slippage,” meaning any expenses not paid for by the tenant are the responsibility of the landlord. Extra due diligence proved this was not the case; this was a property with no surprises. They had to act fast to make an offer and be ready to negotiate.
Negotiations: This property was such a solid opportunity, there was heavy, national buyer competition. Schellin’s market influence, negotiation skills, and the weight of the Westwood Net Lease Advisors brand helped secure the deal.
The Option of Obtaining a Mortgage on the Property
During their first few months of learning the ropes, Schellin also shared the potential benefits of securing a mortgage on an investment property: increased ROI, or Cash-on-Cash (CoC) return, financial leverage, and most importantly, an increase in basis that could be used for additional depreciation.
Rather than paying all cash, the family decided to obtain financing and proceeded to make an offer on their second property, a Dollar General in Connecticut, where contingencies in the purchase contract were waived. After closing on both properties, once they factor in mortgage interest, depreciation, and other tax advantages, their overall internal rate of return (IRR) could ultimately go to an estimated 8+%.
The Result: Family Trust Benefits from Multiple Financial Resources
With Schellin’s support and representation, this family met their financial objectives at a comfortable pace. They deferred all capital gains taxes from the sale of their solar farm and negotiated a profitable pre-construction DaVita net-lease property with a long-term lease that guarantees many years of stable income with no worries. This family Trust now benefits from multiple financial resources.
If you’d like to learn more about the 1031 exchange and all the benefits of NNN investing, call or email Chris Schellin, President of Westwood Net Lease Advisors, at 314-563-2208, for a free, no-obligation consultation.