In this triple net lease case study, we check out a real-world circumstance including the advancement of a build-to-suit industrial residential or commercial property for a leading pharmacy chain in Colombia. By analyzing this scenario, you will acquire hands-on experience analyzing a triple net lease (NNN) structure, a common type of lease in business property, where tenants are accountable for residential or commercial property costs. The task involves the acquisition of land in a tactical area and the building of a residential or commercial property tailored to satisfy the tenant's operational requirements, offering a strong example of a development-focused NNN offer.
Practice makes ideal! This is a genuine scenario based upon actual residential or commercial properties and scenarios. Names and locations have actually been changed for privacy reasons, however the principles are real-to-life.
Each case research study shared in this series mirrors genuine world circumstances, either in regards to the kinds of offers you will look at in different functions or the types of modeling tests you'll be needed to perform as part of the interview procedure. You can browse this and other case studies in the A.CRE Library of Real Estate Case Studies.
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Background
You are a recent graduate of the University of Central Florida (UCF) with a degree in Business Administration, focusing on Real Estate. While studying in Florida, you developed a keen interest in worldwide realty markets, particularly in Latin America. This interest was sustained by your family ties to Colombia, where you invested lots of summers going to family members and witnessing firsthand the rapid urbanization and development in cities like Bogotá and its surrounding areas.
Upon finishing from UCF, you operated in the banking sector in the U.S., gaining valuable experience in financial analysis and investment strategies. However, your passion for real estate led you to join a small genuine estate investment LLC, where you quickly advanced to a function that involved managing monetary modeling for numerous jobs. During this time, you took the A.CRE Real Estate Financial Modeling Accelerator course, becoming a specialist in the field.
Now, leveraging your professional experience and deep understanding of both the U.S. and Colombian markets, you are ready to start your very first real estate financial investment promo in Colombia, in an area you know well from your household connections and regular check outs. This task includes establishing a build-to-suit commercial residential or commercial property for lease to a major pharmacy chain that is broadening rapidly in Colombia and beyond.
Time to Make Your Mark
After years of sharping your abilities and constructing a reputation in real estate monetary modeling, you're prepared to step into the spotlight as a realty promoter. With a wealth of experience behind you and a deep connection to the Colombian market, you're identified to discover a financial investment that promises long-lasting, steady returns-one that can act as the cornerstone of your brand-new endeavor.
As you start your search, you reconnect with brokers who specialize in retail property in Colombia. It's not long before a previous coworker connects with an intriguing opportunity-a land development job in Chía, Cundinamarca, tailored for a major pharmacy chain, BioMedica. The project in concern has a tactical area because the roadways around the lot are being expanded, which will generate more automobile traffic, and strong tenant appeal catch your attention right away. Sensing the potential, you decide to dive much deeper, conducting a comprehensive monetary analysis to identify if this might be the flagship investment that sets your path to success.
The Opportunity
The task involves getting a prime piece of land in Chía, Cundinamarca, and building a build-to-suit commercial residential or commercial property particularly customized to the needs of a leading drugstore chain. The pharmacy has a strong brand name existence and is broadening aggressively in the region, making this an extremely appealing occupant.
This project is particularly engaging due to its tailored design to satisfy the specific needs of the Drugstore, our tenant needs consist of a space with parking area, close roads and drive through, to guarantee optimum operational efficiency and client availability. However, the monetary characteristics of this financial investment require careful consideration. For example, while the lease arrangement provides a rental increase rate throughout the base term and renewal alternatives to hedge against inflation (IPC).
To make a notified choice, it's vital to model the projected financial efficiency of this development and determine if its long-term economics line up with your new firm financial investment strategy.
NNN Case Study - "BioMedica" Chain Drugstore
Main Assumptions
Residential or commercial property Description
google.com
- Address: Calle 2 # 12-24 Chía, Cundinamarca - Colombia.
- GLA: 34,400 SF
- Acreage: 34,444 SF
- Constructed Area: 6,300 SF Replacement Cost (including land worth): $45/SF.
- Land worth: $18/SF.
- Year of building: 2024.
- Lease term arrangement: 15 years. Option: 5-year option renewal.
- Rental boosts: Colombian IPC (consumer Price index) Linked.
- Lease type: Triple Net Lease (NNN) - The proprietor will provide a comprehensive breakdown of these expenses every year, and the occupant will repay the property owner for these costs monthly.
Financial Assumptions
- Land Cost: 620,000 USD. - Closing Costs: 4.5%.
- Development Cost: 843,566 USD.
- Approved Lease: 14,355 USD
Timing
- License: Months 1-3. - Land Purchase: Month 4.
- Development: Months 5-10
Operating Expenses:
- Residential or commercial property management: 7%. - Fiduciary administration and payments: 600 USD/Month.
- Real estate taxes: 1,946 USD/Year.
- Accounting: 500 USD/Month.
- Capital Reserves: 0.5% on the worth of the building, booking proportionally every month.
General Investment Assumptions
- 10-year analysis period. - All-cash purchase (i.e. no funding).
- All running expenses are paid by the renter.
- No capital expenditures over the hold duration.
- Initial cap rate based upon https://latamcaprates.colliers.com/.
- Reversion cap rate is 50 bps above the acquisition cap rate.
- Selling expenses 100 bps less that the asking price.
Market Rent on lease agreement: $2.40/ SF, growing by IPC.
The Task
Use the A.CRE "STNL (Single Tenant Net Lease) Valuation Model" to underwrite this build-to-suit single-tenant net lease (STNL) job. This model is particularly designed for single-tenant, net lease residential or commercial properties and includes functions that enable you to underwrite development jobs from acquisition through stabilization and disposition.
Answer the Following Questions for the BioMedica Project.
- Is the advancement expense per SF above or listed below replacement cost and by just how much? - What is the average totally free and clear return over the 10-yr hold duration?
- What is the IRR over the hold period?
- What is the unlevered equity numerous based on the predicted cash flows over the 10-year hold period, and how does this metric align with your financial investment criteria?
Conceptual Questions
- Evaluate the effect of the lease structure, including rent escalation clauses, on the net present worth (NPV) of the financial investment. How does this influence the general IRR? - How does the location's predicted development and lorry traffic effect the financial investment's capacity for long-term success?
Extra Credit
- Partnership Model: Assume you generate a local financier to contribute 95% of the required equity while your share it's the staying 5%. Propose a waterfall structure where the investor receives a favored return of 9% on their equity contribution, followed by a pari-passu split of remaining capital. Calculate the IRR and equity several for both you and the financier. - Sensitivity Analysis: Conduct a level of sensitivity analysis to reveal how modifications in essential presumptions, such as cap rates, lease escalations, and vacancy rates, impact the total return metrics.
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Frequently Asked Questions about the BioMedica Chain Drugstore Build-to-Suit Investment Case Study
What kind of lease is used in this case study?
This case research study includes a Triple Net Lease (NNN) where the occupant compensates the property owner for residential or commercial property expenses, consisting of taxes, insurance, and maintenance. The lease likewise consists of IPC-linked rental boosts and a 5-year renewal option.
Where is the BioMedica task found?
The task is situated in Chía, Cundinamarca, Colombia at Calle 2 # 12-24, a strategic area anticipated to benefit from roadway expansion and increased automobile traffic.
What are the main development and monetary assumptions?
Land cost: $620,000
Closing expenses: 4.5%
Development expense: $843,566
Approved lease rate: $14,355/ month
Lease term: 15 years with 5-year option
Rental escalation: Linked to IPC
All-cash purchase