In this triple net lease case study, we check out a real-world situation including the development of a build-to-suit commercial residential or commercial property for a leading drugstore chain in Colombia. By examining this scenario, you will acquire hands-on experience analyzing a triple net lease (NNN) structure, a common type of lease in commercial property, where occupants are accountable for residential or commercial property expenditures. The job involves the acquisition of land in a tactical area and the construction of a residential or commercial property tailored to meet the tenant's operational requirements, supplying a strong example of a development-focused NNN offer.

Practice makes ideal! This is a real scenario based on actual residential or commercial properties and scenarios. Names and locations have actually been altered for confidentiality reasons, but the principles are real-to-life.

Each case research study shared in this series mirrors real life circumstances, either in terms of the types of offers you will take a look at in various functions or the types of modeling tests you'll be needed to carry out as part of the interview process. You can browse this and other case research 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, concentrating on Real Estate. While studying in Florida, you established a keen interest in worldwide property markets, especially in Latin America. This interest was fueled by your family ties to Colombia, where you spent numerous summertimes going to relatives and experiencing firsthand the quick urbanization and development in cities like Bogotá and its surrounding areas.

Upon graduating from UCF, you operated in the banking sector in the U.S., acquiring important experience in monetary analysis and financial investment strategies. However, your enthusiasm genuine estate led you to sign up with a little property financial investment LLC, where you rapidly advanced to a function that included managing financial modeling for different jobs. During this time, you took the A.CRE Real Estate Financial Modeling Accelerator course, becoming an expert in the field.

Now, leveraging your expert experience and deep understanding of both the U.S. and Colombian markets, you are prepared to embark on your first realty financial investment promotion in Colombia, in a region you know well from your family connections and regular gos to. This project involves establishing a build-to-suit business residential or commercial property for lease to a significant pharmacy chain that is broadening rapidly in Colombia and beyond.

Time to Make Your Mark

After years of sharping your abilities and building a credibility in property financial modeling, you're ready to enter the spotlight as a realty promoter. With a wealth of experience behind you and a deep connection to the Colombian market, you're figured out to discover a financial investment that promises long-term, steady returns-one that can act as the cornerstone of your brand-new endeavor.

As you begin your search, you reconnect with brokers who focus on retail real estate in Colombia. It's shortly before a previous associate reaches out with an interesting opportunity-a land development project in Chía, Cundinamarca, customized for a significant pharmacy chain, BioMedica. The job in question has a tactical area considering that the roads around the lot are being widened, which will produce more automobile traffic, and strong occupant appeal capture your attention right away. Sensing the capacity, you choose to dive deeper, carrying out a thorough monetary analysis to figure out if this might be the flagship investment that sets your course to success.

The Opportunity

The job involves acquiring a prime piece of land in Chía, Cundinamarca, and building a build-to-suit business residential or commercial property specifically customized to the requirements of a leading pharmacy chain. The drugstore has a strong brand name existence and is broadening strongly in the area, making this a highly attractive occupant.

This job is particularly compelling due to its customized style to fulfill the particular needs of the Drugstore, our renter demands include a space with parking area, close highways and drive through, to make sure ideal operational efficiency and consumer accessibility. However, the monetary dynamics of this financial investment require cautious consideration. For instance, while the lease arrangement offers a rental boost rate throughout the base term and renewal alternatives to hedge against inflation (IPC).

To make a notified choice, it's crucial to design the projected financial performance of this advancement and figure out if its long-lasting economics line up with your new company investment strategy.

NNN Case Study - "BioMedica" Chain Drugstore

Main Assumptions

Residential or commercial property Description

- 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 increases: Colombian IPC (consumer Price index) Linked.
- Lease type: Triple Net Lease (NNN) - The proprietor will offer an in-depth breakdown of these costs every year, and the tenant will compensate the proprietor for these expenditures 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.
- Property tax: 1,946 USD/Year.
- Accounting: 500 USD/Month.
- Capital Reserves: 0.5% on the value of the construction, booking proportionally monthly.

General Investment Assumptions

- 10-year analysis duration.
- All-cash purchase (i.e. no financing).
- All operating expenses are paid by the tenant.
- 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 selling price.
Market Rent on lease contract: $2.40/ SF, growing by IPC.

The Task

Use the A.CRE "STNL (Single Tenant Net Lease) Valuation Model" to finance this build-to-suit single-tenant net lease (STNL) job. This design is particularly designed for single-tenant, net lease residential or commercial properties and includes features that permit you to underwrite development tasks 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 typical totally free and clear return over the 10-yr hold duration?
- What is the IRR over the hold duration?
- What is the unlevered equity multiple based upon the forecasted money flows over the 10-year hold duration, and how does this metric align with your financial investment requirements?

Conceptual Questions

- Evaluate the effect of the lease structure, consisting of lease escalation provisions, on the net present value (NPV) of the financial investment. How does this impact the general IRR?
- How does the place's predicted growth and lorry traffic effect the financial investment's capacity for long-term success?

Extra Credit

- Partnership Model: Assume you generate a local investor to contribute 95% of the required equity while your share it's the staying 5%. Propose a waterfall structure where the financier gets a preferred return of 9% on their equity contribution, followed by a pari-passu split of staying money circulations. Calculate the IRR and equity numerous for both you and the investor.
- Sensitivity Analysis: Conduct a sensitivity analysis to show how modifications in key presumptions, such as cap rates, rent escalations, and vacancy rates, effect the general return metrics.

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Frequently Asked Questions about the BioMedica Chain Drugstore Build-to-Suit Investment Case Study

What type of lease is utilized in this case study?

This case research study involves a Triple Net Lease (NNN) where the renter compensates the property owner for residential or commercial property expenditures, consisting of taxes, insurance coverage, and upkeep. The lease also includes IPC-linked rental increases and a 5-year renewal choice.

Where is the BioMedica task found?

The project lies in Chía, Cundinamarca, Colombia at Calle 2 # 12-24, a strategic area expected to take advantage of roadway growth and increased automobile traffic.

What are the main development and financial assumptions?

Land expense: $620,000

Closing expenses: 4.5%

Development expense: $843,566

Approved lease rate: $14,355/ month

Lease term: 15 years with 5-year choice

Rental escalation: Linked to IPC

All-cash purchase; no financing used

What model should be utilized to finance this case?

The case should be financed using the A.CRE STNL Valuation Model, particularly designed for single-tenant net lease development and investment circumstances.

What types of return metrics should be determined?

You are asked to calculate the:

Development cost per SF vs. replacement cost

Average free and clear return

Unlevered IRR

Equity numerous over a 10-year hold period

How does the lease structure effect the NPV and IRR?

The triple net lease with IPC-linked increases makes sure foreseeable and growing cash flows, enhancing both NPV and IRR by hedging inflation and decreasing proprietor cost danger.

Why is location an essential factor to consider in this case?

The residential or commercial property's location in Chía, a growing area with prepared facilities enhancements, boosts its long-lasting capacity, renter retention, and attract future purchasers.

What presumptions are required for the additional credit partnership design?

Assume:

Investor contributes 95%, you contribute 5%

Investor receives a 9% chosen return

Remaining cash streams split pari-passu
You'll then determine IRRs and equity multiples for both celebrations based upon the waterfall structure.

What does the sensitivity analysis objective to check out?

The level of sensitivity analysis tests how changes in cap rates, lease escalation, and job rates impact return metrics like IRR and equity numerous, helping assess investment risk.

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Acerca del Autor: Emilio es un Analista Financiero del equipo de A.CRE. Tiene una formación diversa, con experiencia en economía de importación y exportación, blockchain, marketing, programación y comercio. Ha construido su carrera involucrándose en proyectos que le apasionan, lo que le ha llevado a interesarse por el sector inmobiliario comercial y por A.CRE. En su tiempo libre, le encanta cocinar y aprender más sobre tecnología. Para contactar a Emilio por correo haz click aqui.