8 Net Lease Properties
Closing date: September/October 2021
Price: $25.6 million total
Cap rate: 6.50% overall
New Triple Net Investor Uses 1031 Exchange to Trade Up to 8 Properties, Collects $1,664,000 in Annual NOI
Within 45 days of selling his mobile home park, this new triple net investor used the 1031 exchange to trade out of one high-maintenance, costly real estate asset into eight low-maintenance and responsibility-free investment properties.
He also deferred millions of dollars in federal capital gains taxes, and with the purchase of the following high-quality properties, earns $1,664,000 a year in net operating income (NOI), for the next 10–15 years.
- 2 Planet Fitness locations
- 2 The Learning Experience child care assets
- 1 Dollar General
- 1 DaVita dialysis center
- 1 Car Wash
- 1 Aaron’s
At the helm of this transaction was Chris Schellin, President of Westwood Net Lease Advisors. He applied expertise and an advisory approach and represented the client from before the property search through closing. “I knew I had to help this buyer locate and contract around $25 million worth of triple nets very quickly – we had one chance to make this a successful transition and save the buyer millions in capital gains taxes,” said Schellin.
The Challenge: Purchasing 5–10 Properties in the 1031 Exchange Timeframe in the Most Competitive Triple Net Market
This was a more complex 1031 exchange than most, which by nature, presents its own challenges. Add that complexity to the tightest triple net market possibly in history and the race to outbid others to secure a purchase contract on each property.
“When you’re dealing with eight different sellers and their brokers across the nation and a 1031 exchange intermediary, various dynamics surface throughout the transaction. The due diligence process can also become lengthy. Since we were under the time constraints of the 1031-exchange, there was no time to waste. It was up to me, as my client’s buyer’s advisor, to help him locate the right properties for his goals, make solid offers that were likely to be accepted, meet all challenges that arose head-on, and ensure the client would close on all properties within the 180-day IRS requirement,” said Schellin.
The Process: Meet the Expected 6.50% Cap Rate by Managing Risk with Diversification
About six weeks prior to the closing of the client’s mobile home park, the buyer and Schellin began working together. The client had a goal of an overall 6.50% cap rate, which at the time, was higher than most triple net properties were offering. Schellin advised his client, in order to achieve a 6.50% cap, he would have to purchase properties that carried a bit more risk than the average triple net. Therefore, it would be in his best interest to diversify to manage that risk.
First, they evaluated different types of properties, asset classes, and industries within the triple net market and discussed the pros and cons of each.
Given the millions of dollars the client must spend to defer the capital gains tax, they would be looking to purchase up to ten properties.
Together, they narrowed the scope of properties of interest before the mobile home park sale closed.
This helped the buyer jump into action as soon as it closed to meet the 45-day, 1031-exchange requirement of identifying in writing, to the IRS, the intended properties for purchase.
Meanwhile, Schellin kept his broker, developer, and seller network up to date on his buyer’s intentions.
This provided the opportunity for his client to have the first chance to view properties, before they were listed, or as soon as they hit the market.
The six weeks of preparation before the mobile home park sale closed, along with Schellin’s reputation in the market, were critical to getting the properties the buyer wanted.
Since most triple net properties are classified as essential, they continue to sell at record pace, putting buyers in bidding wars and driving the price up. With buyer representation, the investor had a much better chance of striking a deal on higher cap rate properties to meet his 6.50% goal without the stress of the seller’s market.
The Client’s Triple Net & Net Lease Property Portfolio
All triple net and net lease single-tenant properties the investor purchased are in high-traffic, prime locations throughout the nation, tenanted by creditworthy tenants. This selection of properties provides diversification by location, industry, tenant type, asset class, and lease type.
Planet Fitness Properties for Sale
The buyer put two Planet Fitness properties under contract first, as they are harder to come by and would start making the client money right away. One is leased by a multi-unit operator (7.15% cap rate) and the other by a 100-unit operator (6.80% cap rate). The more units a franchisee operates, typically, the lower the risk. Both properties are double net leases with parking lot responsibility.
The Learning Experience Child Care Assets
Two brand-new The Learning Experience child care assets with 15-year, double net leases at 6.80% and 7.15% cap rates were also contracted as soon as possible. Both operate with corporate guarantees for the first five years, then the franchisees take over, which accounts for the higher cap rates. This is common with child care assets, but they are still a reliable, stable investment class.
Dollar General Triple Net Property
Next, Schellin’s job was to balance the Planet Fitness’ and The Learning Experiences’ average 7.00% cap rate with more stable, risk-averse properties. With that came the addition of a Dollar General property. This new DG operates with the usual corporate-guaranteed, 15-year, absolute triple net lease with extension options and rent escalations, and a 5.15% cap rate.
DaVita Dialysis Clinic & Triple Net Car Wash
Soon after the Dollar General, the buyer contracted a DaVita Dialysis Clinic with a corporate-guaranteed, 15-year, double net lease, at a 5.25% cap rate, and a Florida car wash from the largest gas station operator in the country with 800+ units. Typically, car washes are run by 10–15 unit operators, making this particular property more risk-averse than most car wash locations. This property carries a 5.60% cap rate.
Aaron’s Single-tenant Triple Net Property
Finally, as the buying process continued, a single-tenant Aaron’s rent to own became available at a 7.00% cap rate. It operates with a 10-year, corporate-guaranteed, triple net lease with rent escalations every five years. The investor contracted on this property to finish out his well-rounded net lease portfolio.
Triple Net vs. Double Net Leases
This Westwood client was fine purchasing a mix of absolute triple net and double net leases. Most double nets include landlord responsibility of roof, structure, and/or parking lot, which in most cases, are a non-issue. These responsibilities still allow a buyer to purchase a property in any state without heavy landlord management. Any maintenance issues with the roof, structure, or parking lot can be addressed during due diligence, before the sale closes.
Regarding the lease type, Schellin offers this advice to potential triple net investors. “When looking at online listings and brochures of triple net properties, if the cap rate is higher than most, be sure to find out why. Often, the advertising will leave out certain details that may not be ideal for your needs, such as with child care assets, where a corporate-guarantee burndown on the lease is common. You may also be responsible for CAM or other hidden expenses. These details are important if you’re wanting a full-term lease guarantee or a completely responsibility-free investment,” said Schellin.
The Result: From Costly Mobile Home Park to 8 Net Lease Properties with Long-term, Guaranteed Monthly Income & $1,664,000 NOI
The buyer proceeded to close on all eight investments within 45 days of the mobile home park closing, well ahead of the 180-day requirement of the 1031 exchange. He was able to defer all federal capital gains taxes and receive cash flow as soon as each property closed.
The investor now has a $25.6M portfolio that provides a worry-free $1,664,000 annual NOI. He has gone from owning one asset in one city to eight different assets with varying degrees of risk, all over the country.
Furthermore, as a result of his newfound income and freedom, this mobile home park investor has referred other park owners to Westwood Net Lease Advisors who have wanted to sell but were not sure what to do with the profits.
“The 1031 exchange is a valuable investment tool for those who want to sell any type of real estate investment. It can help you diversify your portfolio, save money by deferring capital gains tax, earn guaranteed monthly income for years to come, and build wealth with assets whose value won’t fluctuate day-to-day,” explained Schellin.
To Wrap it Up – $25.6M Portfolio with 6.50% Blended Cap Rate + Deferral of Capital Gains Tax = Reliable Returns & Lifestyle Freedom
Due to this buyer-advisor relationship and Schellin’s proven track record of matching buyers with their ideal properties, this new NNN investor successfully traded a mobile home park using a 1031 exchange for eight net lease properties worth $25.6M. He deferred millions of dollars in federal capital gains tax and acquired a diverse portfolio that provides reliable monthly income, lifestyle freedom, and $1.6M in annual NOI.
If you’d like to learn more about the 1031 exchange and all the benefits of triple net investing, call or email Chris Schellin, President of Westwood Net Lease Advisors, a free, no-obligation conversation, 314-563-2208.