In this triple net lease case research study, we explore a real-world scenario involving the development of a build-to-suit commercial residential or commercial property for a leading drugstore chain in Colombia. By examining this situation, you will get hands-on experience evaluating a triple net lease (NNN) structure, a typical kind of lease in industrial real estate, where occupants are accountable for residential or commercial property costs. The project includes the acquisition of land in a strategic location and the building and construction of a residential or commercial property customized to satisfy the occupant's functional needs, providing a strong example of a development-focused NNN offer.

Practice makes ideal! This is a real circumstance based on real residential or commercial properties and circumstances. Names and locations have been changed for confidentiality reasons, however the basics are real-to-life.

Each case research study shared in this series mirrors real world circumstances, either in terms of the kinds of offers you will take a look at in different functions or the types of modeling tests you'll be needed to perform as part of the interview process. 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 current graduate of the University of Central Florida (UCF) with a degree in Business Administration, concentrating on Real Estate. While studying in Florida, you developed an eager interest in international property markets, particularly in Latin America. This interest was sustained by your family ties to Colombia, where you invested many summertimes checking out family members and experiencing firsthand the fast 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., gaining important experience in financial analysis and financial investment strategies. However, your enthusiasm genuine estate led you to sign up with a small realty investment LLC, where you rapidly advanced to a role that included managing monetary modeling for different tasks. During this time, you took the A.CRE Real Estate Financial Modeling Accelerator course, ending up being an expert in the field.

Now, leveraging your expert experience and deep understanding of both the U.S. and Colombian markets, you are all set to start your first realty financial investment promo in Colombia, in a region you know well from your household connections and regular sees. This project involves developing a build-to-suit business residential or commercial property for lease to a major drugstore chain that is expanding quickly in Colombia and beyond.

Time to Make Your Mark

After years of sharping your abilities and constructing a track record in property monetary modeling, you're prepared to step into the spotlight as a property promoter. With a wealth of experience behind you and a deep connection to the Colombian market, you're determined to discover a financial investment that promises long-term, steady returns-one that can work as the foundation of your new endeavor.

As you begin your search, you reconnect with brokers who concentrate on retail realty in Colombia. It's not long before a previous associate connects with an appealing opportunity-a land development job in Chía, Cundinamarca, customized for a significant drug store chain, BioMedica. The project in question has a strategic area since the roads around the lot are being broadened, which will create more car traffic, and strong tenant appeal capture your attention right away. Sensing the capacity, you choose to dive deeper, performing an extensive financial analysis to determine if this could be the flagship investment that sets your path to success.

The Opportunity

The job involves obtaining a prime piece of land in Chía, Cundinamarca, and constructing a build-to-suit commercial residential or commercial property specifically customized to the needs of a leading drugstore chain. The pharmacy has a strong brand name existence and is expanding strongly in the region, making this a highly attractive occupant.

This task is particularly engaging due to its tailored design to satisfy the particular needs of the Drugstore, our tenant needs include a space with parking area, close highways and drive through, to make sure optimum operational effectiveness and consumer accessibility. However, the financial characteristics of this financial investment require cautious consideration. For example, while the lease contract uses a rental increase rate throughout the base term and renewal alternatives to hedge against inflation (IPC).

To make a notified decision, it's crucial to model the forecasted financial performance of this advancement and figure out if its long-lasting economics align with your new firm financial investment technique.

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
- Land Area: 34,444 SF
- Constructed Area: 6,300 SF
Replacement Cost (including land value): $45/SF.
- Land worth: $18/SF.
- Year of building: 2024.
- Lease term arrangement: 15 years.
Option: 5-year choice renewal.
- Rental boosts: Colombian IPC (customer Price index) Linked.
- Lease type: Triple Net Lease (NNN) - The property owner will supply an in-depth breakdown of these expenses annually, and the occupant 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.
- Real estate taxes: 1,946 USD/Year.
- Accounting: 500 USD/Month.
- Capital Reserves: 0.5% on the value of the building, scheduling proportionally every month.

General Investment Assumptions

- 10-year analysis duration.
- All-cash purchase (i.e. no financing).
- All running costs are paid by the renter.
- No capital expenditures over the hold duration.
- Initial cap rate based on https://latamcaprates.colliers.com/.
- Reversion cap rate is 50 bps above the acquisition cap rate.
- Selling costs 100 bps less that the selling cost.
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 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 consists of features that permit you to underwrite advancement tasks from acquisition through stabilization and disposition.

Answer the Following Questions for the BioMedica Project.

- Is the development expense per SF above or below replacement expense and by how much?
- What is the typical complimentary and clear return over the 10-yr hold period?
- What is the IRR over the hold duration?
- What is the unlevered equity numerous based on the forecasted cash flows over the 10-year hold period, and how does this metric align with your investment requirements?

Conceptual Questions

- Evaluate the effect of the lease structure, including rent escalation stipulations, on the net present value (NPV) of the investment. How does this impact the total IRR?
- How does the location's projected growth and lorry traffic effect the investment's capacity for long-lasting success?

Extra Credit

- Partnership Model: Assume you bring in a regional 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 numerous for both you and the financier.
- Sensitivity Analysis: Conduct a level of sensitivity analysis to show how changes in crucial assumptions, such as cap rates, lease escalations, and vacancy rates, effect the overall 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 used in this case research study?

This case study includes a Triple Net Lease (NNN) where the tenant repays the property manager for residential or commercial property expenses, including taxes, insurance coverage, and maintenance. The lease also includes IPC-linked rental increases and a 5-year renewal option.

Where is the BioMedica project found?

The job lies in Chía, Cundinamarca, Colombia at Calle 2 # 12-24, a strategic location expected to benefit from road expansion and increased car traffic.

What are the main advancement and monetary assumptions?

Land cost: $620,000

Closing costs: 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 utilized

What model should be utilized to underwrite this case?

The case must be financed utilizing the A.CRE STNL Valuation Model, specifically designed for single-tenant net lease advancement and financial investment scenarios.

What types of return metrics should be calculated?

You are asked to calculate the:

Development expense per SF vs. replacement expense

Average free and clear return

Unlevered IRR

Equity multiple over a 10-year hold duration

How does the lease structure effect the NPV and IRR?

The triple net lease with IPC-linked increases makes sure foreseeable and growing money flows, improving both NPV and IRR by hedging inflation and decreasing property manager cost danger.

Why is area a crucial factor to consider in this case?

The residential or commercial property's place in Chía, a growing area with planned facilities improvements, enhances its long-term potential, renter retention, and appeal to future purchasers.

What presumptions are needed for the additional credit collaboration design?

Assume:

Investor contributes 95%, you contribute 5%

Investor receives a 9% chosen return

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

What does the level of sensitivity analysis aim to explore?

The level of sensitivity analysis tests how changes in cap rates, lease escalation, and vacancy rates effect return metrics like IRR and equity multiple, assisting examine 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.