In this triple net lease case study, we check out a real-world scenario involving the development of a build-to-suit business residential or commercial property for a leading drugstore chain in Colombia. By examining this circumstance, you will gain hands-on experience analyzing a triple net lease (NNN) structure, a typical kind of lease in commercial realty, where tenants are accountable for residential or commercial property expenditures. The task includes the acquisition of land in a strategic area and the building of a residential or commercial property customized to meet the renter's operational needs, supplying a strong example of a development-focused NNN deal.

Practice makes perfect! This is a genuine scenario based upon actual residential or commercial properties and situations. Names and areas have been changed for confidentiality factors, but the principles are real-to-life.

Each case research study shared in this series mirrors real world scenarios, either in regards to the kinds of deals you will take a look at in different roles or the types of modeling tests you'll be required to carry out as part of the interview process. You can search 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 a keen interest in international property markets, especially in Latin America. This interest was fueled by your family ties to Colombia, where you invested numerous summer seasons visiting family members and witnessing firsthand the fast urbanization and development in cities like Bogotá and its surrounding locations.

Upon graduating from UCF, you operated in the banking sector in the U.S., acquiring important experience in financial analysis and investment methods. However, your passion for genuine estate led you to sign up with a little property financial investment LLC, where you quickly advanced to a role that involved managing monetary modeling for various projects. During this time, you took the A.CRE Real Estate Financial Modeling Accelerator course, becoming a professional in the field.

Now, leveraging your expert experience and deep understanding of both the U.S. and Colombian markets, you are ready to start your very first property financial investment promo in Colombia, in an area you know well from your household connections and regular gos to. This project involves developing a build-to-suit business residential or commercial property for lease to a significant drugstore chain that is expanding rapidly in Colombia and beyond.

Time to Make Your Mark

After years of sharping your abilities and building a credibility in genuine 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 guarantees long-lasting, steady returns-one that can work as the foundation of your brand-new venture.

As you begin your search, you reconnect with brokers who focus on retail property in Colombia. It's not long before a former colleague reaches out with an appealing opportunity-a land development job in Chía, Cundinamarca, customized for a significant pharmacy chain, BioMedica. The project in question has a strategic location considering that the roadways around the lot are being expanded, which will produce more car traffic, and strong tenant appeal capture your attention instantly. Sensing the potential, you choose to dive much deeper, conducting a thorough monetary analysis to identify if this might be the flagship financial investment that sets your path 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 particularly tailored to the needs of a leading drugstore chain. The pharmacy has a strong brand name presence and is expanding strongly in the area, making this a highly appealing renter.

This job is particularly compelling due to its customized design to satisfy the specific requirements of the Drugstore, our renter needs include an area with parking area, close roads and drive through, to ensure optimum operational performance and customer availability. However, the financial dynamics of this investment need cautious factor to consider. For instance, while the lease arrangement provides a rental boost rate throughout the base term and renewal alternatives to hedge against inflation (IPC).

To make a notified choice, it's important to model the projected financial efficiency of this advancement and figure out if its long-lasting economics line up with your brand-new company 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

- 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 agreement: 15 years.

Option: 5-year alternative renewal.

- Rental increases: Colombian IPC (customer Price index) Linked.

- Lease type: Triple Net Lease (NNN) - The landlord will offer an in-depth breakdown of these costs each year, and the occupant will repay the landlord 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 construction, scheduling proportionally each month.

General Investment Assumptions

- 10-year analysis duration.

- All-cash purchase (i.e. no funding).

- All running costs are paid by the tenant.

- No capital investment over the hold duration.

- Initial cap rate based on https://latamcaprates.colliers.com/.

- Reversion cap rate is 50 bps above the rate.

- Selling expenses 100 bps less that the selling rate.

Market Rent on lease arrangement: $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) project. This model is specifically created for single-tenant, net lease residential or commercial properties and consists of functions that allow you to finance development tasks from acquisition through stabilization and disposition.

Answer the Following Questions for the BioMedica Project.

- Is the advancement expense per SF above or below replacement cost 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 period?

- What is the unlevered equity numerous based on the predicted cash streams over the 10-year hold period, and how does this metric align with your financial investment criteria?

Conceptual Questions

- Evaluate the impact of the lease structure, including rent escalation provisions, on the net present worth (NPV) of the investment. How does this influence the overall IRR?

- How does the place's predicted development and lorry traffic impact the financial investment's potential for long-term success?

Extra Credit

- Partnership Model: Assume you generate a regional financier to contribute 95% of the required equity while your share it's the remaining 5%. Propose a waterfall structure where the financier 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 investor.

- Sensitivity Analysis: Conduct a level of sensitivity analysis to reveal how changes in essential assumptions, such as cap rates, rent escalations, and job rates, effect the total 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 research study?

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

Where is the BioMedica project located?

The task is located in Chía, Cundinamarca, Colombia at Calle 2 # 12-24, a strategic location anticipated to benefit from roadway expansion and increased car traffic.

What are the primary development and monetary presumptions?

Land expense: $620,000

Closing expenses: 4.5%

Development cost: $843,566

Approved lease rate: $14,355/ month

Lease term: 15 years with 5-year option

Rental escalation: Linked to IPC

All-cash purchase; no financing utilized

What design should be used to underwrite this case?

The case should be underwritten utilizing the A.CRE STNL Valuation Model, specifically designed for single-tenant net lease advancement and investment circumstances.

What kinds of return metrics should be computed?

You are asked to determine the:

Development cost per SF vs. replacement cost

Average complimentary and clear return

Unlevered IRR

Equity multiple over a 10-year hold period

How does the lease structure effect the NPV and IRR?

The triple net lease with IPC-linked boosts makes sure foreseeable and growing cash circulations, boosting both NPV and IRR by hedging inflation and lessening property owner expense risk.

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

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

What assumptions are required for the extra credit partnership design?

Assume:

Investor contributes 95%, you contribute 5%

Investor gets a 9% chosen return

Remaining money streams split pari-passu

You'll then compute IRRs and equity multiples for both parties based upon the waterfall structure.

What does the sensitivity analysis objective to explore?

The level of sensitivity analysis tests how changes in cap rates, rent escalation, and vacancy rates impact return metrics like IRR and equity several, assisting examine financial investment risk.

Try Another Case: In the exact same method that A.CRE has actually made openly readily available over 60 institutional-quality property designs, we're now on an objective to construct the biggest library of totally free real estate case research studies. Browse the library today.

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.