Dollar General, Mount Vernon, IL
December 4, 2020
6.90% cap rate
A Reverse 1031 Wasn’t in the Buyer’s Plan but it Allowed her to Purchase a Highly Sought After Dollar General
Upon referral, a St. Louis-based investor who wanted to use a 1031 exchange to buy a NNN lease property, contacted Mike Kocur, Buyer’s Advisor at Westwood Net Lease Advisors, for assistance with the process.
One challenge this savvy commercial real estate buyer faced was that she hadn’t closed on the sale of her retail building yet and wasn’t sure how that would work with the timing of the 1031 exchange. Additionally, she planned to finance the NNN property, which could have been an issue depending on the level of risk inherent with the property.
However, Kocur’s understanding of the various 1031 exchange opportunities along with how the banks were adjusting to the new way of doing business during the pandemic, facilitated the purchase of a unique Dollar General. He helped his buyer secure a cap rate of 6.90%, and a low-interest commercial mortgage despite an unusually short-term, double-net lease.
So, why was this CRE investor’s offer accepted on a highly sought-after Dollar General when she had yet to sell her retail building, and how did she manage to perform a 1031 exchange without closing on that sale first?
The Challenge – Using a 1031 Exchange in an Extremely Tight Market When the Sale of Buyer’s Original Property Had Yet to Close
When they started the property search, Kocur encouraged his client to choose one with an investment-grade tenant and a corporate-guaranteed lease. These factors would help reduce her risk and make her a better candidate for financing.
When Kocur located this Illinois Dollar General for sale, his client didn’t want to miss the ownership opportunity. That’s when he suggested she use a reverse 1031 exchange. After learning the details, she agreed it would be the best course of action. Kocur then began the process of helping her purchase the property and meet the reverse 1031 exchange, 45-day IRS deadline.
Would the complexity of a reverse 1031 exchange allow her to meet the 1031 timeline?
Normally, a 1031 exchange is executed before a replacement property is found. Often the owner prepares to sell an income property, begins the 1031 exchange process, and then searches for a replacement property. Which is what she intended.
In this case, however, the client found her replacement property before she sold her relinquished retail property. This meant that the company executing the exchange had to take title of either the relinquished property or the new one.
Since timing is critical in a reverse 1031 exchange – still the initial 45-day time limit – she had to get all necessary documents to the IRS as quickly as possible, including:
- a copy of the purchase contract
- a copy of the title report
- the Phase 1 environmental report
- property insurance that shows the exchange company owns the property
- proof of liability coverage for the property
Another critical factor in her deal coming together was whether the lender would be willing to participate in the 1031 exchange as an overseer. Why?
Most loans are recourse loans, preventing the owner from transferring title to anyone other than the owner, unless a sale is taking place. Since the exchange company legally holds the title, her lender had to approve adding non-recourse language to the loan documents and transfer the property when the exchange was completed.
Even as a veteran CRE investor, this buyer needed her Westwood Advisor and team of 1031 specialists to avoid the pitfalls that might invalidate her exchange and make the Dollar General purchase fall through.
Why Did the Buyer Want this Dollar General so Much She Would go Through a Complicated Reverse Exchange?
Firstly, it is nearly impossible to find a NNN lease investment in the pandemic marketplace. Most of these high-quality, essential properties with high-credit tenants are selling before they hit the open market. One must act fast to secure a Dollar General, Auto Zone, 7-Eleven, or any other NNN property.
Secondly, despite this store operating with a double-net plus (NN+) lease and an unusually short remaining lease term (six years), the property has many positive attributes that make up for the length of the lease.
- It has been a thriving business for decades, positioned in a prime location on a main thoroughfare.
- Its location contributes to over $3 million in annual store sales; the average DG brings in about $2 million per year.
- This property provides 100% income stability for the lease term of 6 years, plus four 5-year lease extension options and rental increases of 10% at each five-year increment.
- This DG could potentially provide 26 years of escalating, guaranteed income.
You may be thinking, “aren’t most Dollar Generals triple-net lease investments?” Yes, however, Dollar General stores built and leased before 2011 are all modified NNNs or what is also called a “double-net-plus” lease. These leases typically call for landlord responsibilities of roof, structure, and parking lot, but often offer a higher cap rate and a lower sale price to compensate.
Moreover, since Dollar General is an investment-grade tenant that performs well in any economy, Kocur felt confident that financing would be attainable, and he was right. She secured a low interest rate, still leaving her with an annual NOI of about $35,000.
The Result – Dollar General Ownership Without Routine Responsibility & Guaranteed Monthly Income
This investor’s $1,276,000 offer was accepted on this popular Dollar General property even though she had yet to sell her retail building because of Westwood’s reputation for bringing qualified buyers to the table and their high close rate. The seller’s agent felt confident Kocur would enable an efficient, trouble-free transaction, and use his 1031 expertise to get to the closing table without hassle. Thanks to Kocur’s help and dedication, his client:
- Traded a vacant retail building that was costing money for a stress-free, virtually maintenance-free Dollar General property.
- Receives mailbox money from a multi-million-dollar corporation monthly, providing tens of thousands of dollars in income per year.
- Deferred 100% of the capital gains tax from the sale of the relinquished retail property, putting that money to work for her future.
- Secured a healthy cap rate to interest rate spread, potentially creating positive leverage down the road.
- Gets to look forward to a possible 26 years of guaranteed monthly income with 10% rent escalations, and few to no landlord responsibilities.
To Wrap it Up – Seasoned Investor Engages Kocur at Westwood for NNN Investment, Uses a Reverse 1031 Exchange to Close the Deal
Utilizing Kocur’s net-lease investment and 1031 proficiency, this seasoned investor now owns a reliable Dollar General property that meets her financial goals with no routine landlord responsibilities. She has a stable addition to her investment portfolio and reaps the rewards of passive monthly income for years to come.
If you are interested in learning more about NNN lease investments or would like to use the 1031 exchange to trade an underperforming property for one that offers nothing but benefits, contact Mike Kocur today, 314.584.9857. His no-obligation consultations and buyer representation are free.