Ever wonder how the world of net lease properties operates or how you can navigate it? Prepare to gain valuable insights from our experienced guest, Russell Wachtler from NNNPro Group. With his two decades of experience in the industry, you'll be guided through the ins and outs of net lease asset class. We explore underwriting, 1031 exchanges, sale leasebacks, bonus depreciation, and much more. We also dive into the impact of rising interest rates on capital cost and cap rates, providing a fresh perspective on how local credit unions might offer better terms. It's a power-packed discussion that will leave you equipped with the knowledge to succeed in the net lease space.
1:50 - Interest Rates
5:15 - Net Lease Asset Class
11:09 - Exploring Sale Leasebacks and Net Lease
16:20 - Net Lease Tenants Scenarios and Examples
29:45 - Buyer Profiles
33:40 - Net Lease Tax Strategy: 1031 Exchanges and Bonus Depreciation
44:29 - Retail Repositioning and Development
55:00 - Creative Real Estate Strategies and Opportunities
Contact: Russell Wachtler
(o) 332.345.4206 | (c) 646.643.0418
(e) rwachtler@nnnpro.com
Follow IPRG: @iprg_ny
www.IPRG.com
Follow IPRG: @iprg_ny
www.IPRG.com
Ever wonder how the world of net lease properties operates or how you can navigate it? Prepare to gain valuable insights from our experienced guest, Russell Wachtler from NNNPro Group. With his two decades of experience in the industry, you'll be guided through the ins and outs of net lease asset class. We explore underwriting, 1031 exchanges, sale leasebacks, bonus depreciation, and much more. We also dive into the impact of rising interest rates on capital cost and cap rates, providing a fresh perspective on how local credit unions might offer better terms. It's a power-packed discussion that will leave you equipped with the knowledge to succeed in the net lease space.
1:50 - Interest Rates
5:15 - Net Lease Asset Class
11:09 - Exploring Sale Leasebacks and Net Lease
16:20 - Net Lease Tenants Scenarios and Examples
29:45 - Buyer Profiles
33:40 - Net Lease Tax Strategy: 1031 Exchanges and Bonus Depreciation
44:29 - Retail Repositioning and Development
55:00 - Creative Real Estate Strategies and Opportunities
Contact: Russell Wachtler
(o) 332.345.4206 | (c) 646.643.0418
(e) rwachtler@nnnpro.com
Follow IPRG: @iprg_ny
www.IPRG.com
Follow IPRG: @iprg_ny
www.IPRG.com
All right, we're here back at the real estate roundtable with IPRG. I'm joined today with Luke's Proviaro and we have a guest, Russ Walkler from NNNPro Group. Russ is a senior managing director over at NNNPro.
Speaker 2:So welcome Russ. Thanks for having me, guys. I'm excited to be here. Love the office too, just walking around there. Your views are definitely a lot for you in ours in the midtown, loving it.
Speaker 3:Yeah, we're happy with it. The downtown views are good. The buildings are not. It's not so condensed. You see the river, you see you can see some stuff. Yeah, the midtown's great, definitely a perk.
Speaker 2:Yeah, cool, thanks for having me, yeah 100%.
Speaker 1:We've known you for a long time, been done a lot of business together. You've been in the netly space for, I think, almost 20 years. Coming up on it, yeah, wow, yeah, let's catch up a little bit. But just before we start I just want to run through like the docket of what we're planning to talk about today, so the listeners can kind of jump around if they so choose and we'll see where this whole conversation goes. But we're going to start off talking about the net lease asset class as a whole and we'll talk about underwriting and just the different angles and aspects to the net lease marketplace, I guess, which is around the country. We'll talk about 1031 exchange buyers and how that makes up a portion of the net lease space. We'll talk about sale leasebacks yes, we'll talk about bonus depreciation and then towards the end, we'll talk about, I guess you could say, net lease development or repositioning net lease properties and some creative deals and deal structures that you've worked on Perfect.
Speaker 2:Yeah, yeah, so you want to start at the top?
Speaker 3:Yeah well, let's just catch up for it, man.
Speaker 1:How's everything going? The market has changed a lot in a lot of ways for us. The interest rates we're talking in November of 2023 and interest rates has really been at the top of everyone's mind, Just broadly speaking. How are things going and how's that impacting you guys?
Speaker 2:Oh yeah. So, just like you guys, it obviously has an impact on our business. It has an impact on real estate across the board. When you're looking to finance a transaction, the interest rates are higher today, so there's your cost of capital is higher, so you can't afford to pay the same that maybe you were previously able to pay and accept the same returns. So there is an impact. Cap rates are trending higher today.
Speaker 2:It's kind of cyclical, like your business, and we're seeing similar trends, maybe not the same extent of the swings. We're seeing it more on the institutional side. Just their dividends are higher, their cost of capital is higher. So the publicly traded REITs and the people in that bucket are obviously chasing higher yield today. And then the private market. I think it depends on the price point where we're talking about called below $3 million. There's still a huge private market and those people it's just a larger buyer pool they're willing to pay a little bit more than mostly all cash transactions, even though there are financing options out there and there's everything in between. But the cap rates are definitely higher today than they were a year ago and we'll see what the future holds here. But I do think once the financing market starts to stabilize a little bit, it will free up more liquidity and I do expect to see more transactions for you guys and for us.
Speaker 3:Yeah, from our side of the table, when we do deals together, our colleagues who deals with your group we really pass it off to you. Guys do the deals and I don't know how the financing works, but I guess you put the clients in touch with the right banks. Is it the same type of banks that we're dealing with that you guys deal with, or is it banks that are set up to do triple net deals?
Speaker 2:So it's both and everything in between. We've had a lot of success finding local credit unions in certain markets and partnering with mortgage brokers that do specialize in Netlease. It's been kind of hit or miss. There are some national and regional banks that are still active in the Netlease space. I think more banks are still getting educated on Netlease and growing in the sector but are allocating more money to it on the go forward. But every now and then you find the local credit union that's a diamond in the rough that's offering 50, 100 basis points or just better terms. Better am, whatever the case might be, and insert markets versus others.
Speaker 2:All right so you got to treat each deal or each property an opportunity like its own.
Speaker 3:And everything's different. Right, it's like us with location. Different tenants command a more compressed cap rate than others. Obviously, there's still tenants that haven't really are still around the same yield even though they're in stritch much higher.
Speaker 2:Yeah, there's some called best in class. The Chick-fil-A is the McDonald's People. Just there's pride of ownership there. People get excited by those concepts, they want to own them and those cap rates have trickled up a little bit, but not as much as you would think. There's definitely people chasing best in class. You could sleep at night knowing you have Chick-fil-A. I mean, their average sales are over $8 million a store. Now it's kind of astronomical numbers. And there's some people that are just chasing ultimate safety and return secondary. Just making sure the money's there every month is most important. All right, All right.
Speaker 1:So let's take a back step here. Let's set the table properly. So in net lease property like this, is what you sell, sell yourself across the country. What are the net lease properties? Just help me understand this. Say that I've never heard about the asset class.
Speaker 2:Sure, yeah, let's break it down.
Speaker 1:I'm a broker, tim an owner, and some broker approaches me and says hey, man, sell your apartment building, don't deal with the tenants. 1031 exchange by a net lease. So what is?
Speaker 2:this whole thing about. So, as you guys are familiar in your world, you're dealing with very management intensive properties.
Speaker 2:Like I'm, sure that a lot of your landlords are just those midnight phone calls where your roof's leaking, the toilet's clogged, whatever the case might be, there's a lot of responsibility. That comes with owning a multifamily building, especially New York's not making it any easier. If I hear everybody complaining, it's also true. But a net lease property essentially holds the tenant responsible for everything at the property, from taxes, insurance, maintenance, the works. So a true triple net asset is almost more of a bond-like return. There are some minimal responsibilities, we'll say. I want to say it's totally 100% hands off. You might have some minimal responsibility on an annual basis, but in the grand scheme of things it's way more passive. It's not very time consuming. The money comes in. A lot of these are big corporations though the wire the money on the first of every month and you're just taking out some of the guessing games with whatever your capital expenses might be, because the tenant's responsible for everything. And then true net lease.
Speaker 1:Got it. You're the landlord. You buy the real estate, you buy the land and the building and then you have a lease with some company, some corporation and in the lease they pay the real estate taxes, they pay the insurance, they pay the repairs and they pay rent Correct.
Speaker 2:So the lease really dictates it, but then the better structure leases. It really is a passive form of ownership.
Speaker 3:So the toilet overflows at Chipotle like that's on Chipotle. You're not going to get a call about that on the roof.
Speaker 2:Yeah, they get a phone call. That's on the tenant to deal with. You're not getting phone calls, so it's different, right? I mean people coming from your world. I've had so many cases where, oh, new York's real estate is what we know and what we own. There are families that have it for generations and we've had people maybe dip their toe in like, all right, I'll test out net lease. Let me try it on one property. Just this thing, this building's a nightmare. Let me go buy something passive. And those are the people that five, six, 10 transactions later they're changing the whole structure of their portfolio, they're seeing the beauty of how it works and it's just more consistent income with the left side. That's the goal.
Speaker 1:So the. So the is. The main metric you look at in the sale of these is you're looking at the cap rate, you're looking at the yield that the property generates relative to the price that's a piece of the puzzle A lot of times the cap rates indicative of the credit.
Speaker 2:like just like every other investment in the world, there are risks, even even in that lease. And if you're buying the best credit with the longest term leases in the best locations, they're going to have the lowest cap rate, which because they're taken on the least amount of risk.
Speaker 1:What's the? What's the lowest cap rate property you've ever, you've ever seen sell.
Speaker 2:There's been unique situations, but let's just call it more of a down the middle transaction yeah. You saw Chick-fil-A's and McDonald's trading the threes In the three caps.
Speaker 1:Yeah, and how about now? Where's the market of today?
Speaker 2:I still there's still some McDonald's and Chick-fil-A's trading close to four, Like maybe you could still dip your toe in the three cap range, which is doesn't make a lot of sense from a financing standpoint. But there are people that just want ultimate safety or love the real estate or love the concept. For one reason or another, that's more the exception, not the norm today, but but it does still exist.
Speaker 1:And how about on the high end, like not unique, not the unique situations, but like the down, the middle type of properties? What's like a high?
Speaker 2:On the middle, I'd say, is more. You could get a nice blend of credit and real estate somewhere between the six and the 7% return. Today, like, the numbers are definitely higher and every person's different.
Speaker 1:Explain what you mean by credit and real estate Sure.
Speaker 2:So just who's signing your lease? So what tenant is actually guaranteeing that rent? Is it a small franchisee or is it Chase Bank? Is it the big publicly traded corporation? Just understanding who's actually making sure that rent payment comes every month and managing and maintaining the property and there's everything in between. And we've kind of and part of the process is getting to know each client and understanding their risk tolerance and what's going to be attractive to them. And there's we will talk more about it later about bonus depreciation and other tax strategies in the net lease world.
Speaker 2:But we I often joke and I say Florida is the sixth borough of New York because so many people here have a primary residence in Florida that they're in for at least six months in one day a year. So they don't pay state income tax and they'll only buy properties and income tax free state so they could take advantage of that. So they're and they can also write off trips to Florida. There's other benefits and perks to doing so, but it really is catered to each individual client. We want to get to know them, we want to understand their likes, dislikes, beliefs. And the beauty is New York's kind of a defined space and I know most of your investors will be like hey, I only invest in Williamsburg, I only invest in a certain market Net lease. I have owners here in New York that own, and probably in all 50 states at this point.
Speaker 3:Really.
Speaker 2:So there's just certain draws and that's a way to diversify your portfolio through location credits tenants. There's a lot of ways to kind of hedge your best.
Speaker 3:Have a good question. So obviously things change as Amazon and all this stuff, like different businesses, are hot at different times. But you brought up you said, like the golden trial, you said two places, obviously McDonald's and Chick-fil-A. Both are food places. Is that fast food, that type of thing? The Chipotle, McDonald's, all that? Is that the hottest thing right now?
Speaker 2:I personally have always liked fast food. I've found that, like McDonald's locations that I grew up in, there are still McDonald's and good economies and bad economies. They do well, so I like that they're smaller, more bite-sized, everything's millions of dollars here.
Speaker 1:How much are they?
Speaker 2:Anywhere from one to two million to seven million to four and five, six, seven million. Just depends where and what rent they could afford to pay and what deal was struck with the developer or the tenant at that point in time.
Speaker 3:We'll get into it later. But or 30 million or 40 million, that's much larger scale.
Speaker 1:I'd love to actually click into how much rent they can pay. How do these companies determine what the rent is that they can pay in these locations? It's all based on store sales, so they have those.
Speaker 2:Correct. They have their internal metrics and we might be a good segue to talk about sell leasebacks, which is a big part of our business. Sure, and I'll tie them to the restaurant world too, even though this goes way beyond that to other types of uses and tenants. But specifically on the restaurant space, we meet with operators a lot of times franchisees or corporations and we help them come up with a strategy of how much rent they could comfortably afford to pay, and whether it's a percent of sales or certain EBITDA coverages. Part of the goal is to make sure they're successful in paying a rent that they could support long term and helping them figure out what that metric is where they could rent that they could support versus maximizing value on the sale leaseback.
Speaker 1:So okay, can you just I'm not sure if everyone listening understands. But what is a sale leaseback Sure?
Speaker 2:So a sale leaseback is a relationship where a tenant may own the business and the real estate at a location and we work with these tenants to come up with a strategy where they basically bifurcate the business and the real estate. They would then sell the real estate to an individual or a court a REIT, a high net worth rental, somebody that wants to own this real estate and have a long term commitment from the tenant. So a lot of tenants are in the flipping burger game. They're not in the real estate game.
Speaker 3:That's like McDonald's whole. Thing.
Speaker 2:Well they're a little user-easy example, because they have some ties to real estate but let's just say the Burger King franchisee.
Speaker 2:Yeah, and that's it. Well done, thanks. Every one of you Basically doesn't have to have all this capital tied up in his real estate so we could structure, sell least back where he could sell, you guys. His location commit to a twenty term lease. With the twenty year lease term with options, we can trolling that real estate for very long period of time and the money he's able to pull out from there can be used to grow his business, to pay off debt, to be used to renovate whatever, whatever his capital needs are.
Speaker 1:But they have a ton of Equity and liquidity tied up in the real estate that they might not need it there, and so you guys meet with these business owners, you go through the numbers in terms of what they're bringing in, what their, what the costs are, and you basically determine what the least structure in the rent structure should look like exactly and how much money they'll get in a sale.
Speaker 2:Yeah, well, different scenarios with them and kind of give them the whole whole menu of hay. If we run it this way, here's how the numbers look, and we could tweak it and do things Slightly different and it would look like this.
Speaker 3:But just to back up a little farther, because I don't, so I understand so like a burger king, right. So people actually still own like that, the lease and the building.
Speaker 2:So there's a lot of common because it is there's a lot of tenants that own that own their real estate, and they didn't buy it as necessarily investment. They bought it to build a business there.
Speaker 3:They didn't buy as a real estate but that business is a corporate, corporate guaranteed business, right. So that are they like building a building, and we've done them for corporations.
Speaker 2:Yeah, panera breads one of our teams. Big clients, yeah them specifically. They go and build stores and once they buy those. They'll buy it, they'll build it and then, once it's built, they'll go and sell it just to recoup the cost, because they don't want so much capital tied up in real estate. They want to take the proceeds to go open another location and that's where they're really making their Fifteen, twenty percent a year on making sandwiches and selling salads.
Speaker 1:Interesting. So it's on real estate division where they're buying. Putting themselves in signing a lease and then liquidating it frees up the capital they could go replete, not know they're them specifically.
Speaker 2:They're not even really taking profits, I mean from their situation. They just want to take the money and rolled into another store.
Speaker 1:Why are they buying this piece in first place? Why not just lease it?
Speaker 2:They have their own real estate team, their own construction crews. They could do things the way they want to and set the rent that levels are.
Speaker 3:I kind of get that like you have to have everything look the same same materials, same style, same everything, and probably one builder or not one builder, but like one team.
Speaker 2:Makes sense. They, they have a model that works and a lot of these corporations. Just, you have better uses for the capital instead of owning real estate. I agree with that. More yield elsewhere.
Speaker 1:Okay, that's interesting yeah, so so we spoke, I feel like, about the food piece of the net lease market, a little bit like what other asset classes are there and what are the trends in that space and how, how are those different types of as a class is?
Speaker 2:performing. So everybody here's net lease. That that's in the industry and it's always like a Walgreens CVS, some of Chase Bank, some of the standard Like thoughts that come to mind. But we've tried to be creative. I mean, we've Created them the market for car washes and we did about a billion and a half plus and sales last year. Again, that's bonus. Depreciation related will touch on that later. But we've done funeral homes, we've done amusement parks. We were talking about the nightclub we did in Brooklyn a few years ago. Any freestanding building or property anywhere in the country we could essentially put in that lease on.
Speaker 1:I think we've done car, done gas stations together.
Speaker 3:yeah, your homes are pretty good and that makes sense to me, yeah.
Speaker 1:I mean it can be replaced. It's you are dying. Pretty perception proof business, yeah, so it's like that's pretty good, that food, food.
Speaker 3:Yeah, bank scare me, and this is just Things were that are replaced. Like everyone can bank on their cell phone, right, like do you really I sell, like I'm Somewhat old school, like I like going to yeah and putting my check in instead of like scanning it on my phone? People do that. Obviously, most people do it. I don't. But Do you really have to go to these bank branches so banks, banks have realized this to.
Speaker 2:Yeah, they they're not building the grandiose. So banks that used to build building smaller footprints, less tellers, more ATMs, their their customer catering to their customers needs. But I will say I'll bet on Chase's credit. I wouldn't mind on in the Chase bank if Chase goes out as a business. We have a lot bigger issues in this country.
Speaker 3:Plus, it makes sense that I'm thinking about this like so, how right, like none of the businesses, and so how make money? But they need to have their, they need to be recognized by the people walking around. So we'll have to see their. It's my, their, some of it's a marketing expense. Maybe bank of America is always on my mind some walking around the city. Bank of America, bank of America, like, if you're not seeing it, it's almost Not really in your life.
Speaker 2:Right makes sense, doesn't make sense. You're not there every day, but it's. It's part of their marketing, part of their advertising, and they're going to keep morphing and catering and customizing to clients needs. Do you feel like?
Speaker 3:bank is still safe bet.
Speaker 2:I think bank credit still very safe. I think some of the older huge bank branches. It's some. It's great real estate and you're going to have alternative uses over time. But the banks don't need the same footprint they used to.
Speaker 3:Makes sense. And then, what are your thoughts on? Like with Derek touched on, like the CVS is the Walgreens, because that's also like an Amazon slash delivery issue, right.
Speaker 2:Yeah, I mean there's, I can make arguments, and both sides of the fence yeah, we've kind of heard it all from clients just through discussions and Good real estate and good markets always has value. So, and that's specifically the drug stores right, it has. It has it's troubles now and they're they're out there trying to get some reductions from landlords and trying to just figure out the next phase of their business. But People who bought good real estate and good markets are going to be fine. And that part of our process is kind of pointing out the good, the bad and the ugly on every investment and and making sure the client understands hey, here's what can happen, here's what may happen, and some will be a win. Maybe it's a right that's been there for 30 years on the cheap rent and you're excited to get rid of them and then you could get much Better rent and higher rent and from a better use. Yeah, for sure if the location warrants.
Speaker 3:I mean there's the wallgreens in in Park South, I'm sure on fifth, it's fifth Avenue, or Dwayne Reed, whatever it is. I'm sure they would love to have them go out and get way more.
Speaker 1:It's like they're, they're, they're encumbering all the value. Yeah, it's a development site. There's a bunch of, there's a lease in place and below mark significantly below market. You go to these places to relative to the vacant value you go to these Dwayne Reed's like the one by our office.
Speaker 3:The one by our office down here on Broadway. I think one in three people is just stealing from them. It's not one, that Three, I want to. It's insane, I'm sick. We see every time in there there's someone running out with stuff right, and it's like you feel like a kind of a shrunken line, like I'm paying for this, like everyone's just robbing them. It's a real problem and they are. That's a big problem in certain markets because they are.
Speaker 2:Yeah, I mean everyone's left if you get caught in. San Francisco, all these tenants closed, everything you can't like. I watched a guy like two days ago I think it was Monday.
Speaker 3:He walked out a full meal Come Zanny's, like God I missed sandwich today. Some cheese, a drink. It just walks out. It's just like it's whatever.
Speaker 2:It's a problem and Certain areas like San Francisco and certain markets. It's a real issue, and Some of the stores are no longer profitable because they're being robbed blind, literally, and there's nothing that you could do with the local laws and it's caused issues. All right, so just the same way. So you're Well, hang on, I go.
Speaker 3:All right, so it ended in pro. You guys have people who are.
Speaker 1:Calling the market, trying to find owners of net least properties that will List and sell the properties with you, correct. So like one of the one of the associates comes, comes running up to you and they just call the guy and the person wants to sell their net least property could be anything. How do you go about valuing the property? Do you? Do you just slap a cap rate on it or Are you looking into, like, the rent per foot and the demographics of the market traffic? Yeah, the traffic.
Speaker 3:So we look at here.
Speaker 1:How do you value one of these deals?
Speaker 2:Sure, we look into everything. We have a pretty thorough approach of how we look at these assets, one we take pride. Our team goes and visits every asset we list, so I will know a lot of our competitors don't necessarily do that, and we have so much technology at our fingertips today when it's less necessary but there's still is value. You still want to know what's going on with the neighbors, how's the property look, more than just a couple of pictures. Maybe Amazon's opening or closing a facility up the road? You won't know that until you actually go down there and look around and you also just get a little bit of a gut check.
Speaker 2:There's no like perfect science on what we do, kind of a blend of checking a lot of boxes and doing whatever homework we can. But we will look at all the comps, look at the credit of the tenant, look at the blend of the lease term and the rental increases. We'll review the lease. I mean there's a lot that goes into it Got it, and each one's different. Like, as much as it might be two Walgreens with 15 years on the lease in different markets, we might value them differently. It's the same credit, ok. So you?
Speaker 1:look at you say that you do a gut check, like, like. What is the gut check? Is it to like? Is there, like, a risk that the tenants going to leave, due to the tenants leave, is there a risk that they're not going to pay the tenants going to?
Speaker 2:leave, but you, you'll go see the tenants leave, but you, you'll go see the real estate and you'll get a certain feel for it. And they probably should have brought this up previously. Even with Chase Bank and Walgreens, if you're buying good credit and then we were talking about how they're closing stores in certain markets Just because they're, they're getting robbed and there's reasons why it doesn't make economic sense to keep those stores open.
Speaker 2:They still owe you the rent. You're an obligation on their balance sheet. They're still paying rent on those locations. They just made the business decision to close the store, but they're not thinking out of the lease. They can't get out of the lease, so these are.
Speaker 1:This is for any company, or just like for these big corporations.
Speaker 2:It depends how the lease is written, obviously, and you want to make sure you have higher in the tourney and where I've read thousands of lease at this point. But I still say higher in the tourney, higher in the count and higher the professionals in each sector, just to kind of check your boxes. But in a true triple net lease, the tenant, tenants on the hook. I mean I've seen plenty of situations where it was just a business decision to close the store but they're still paying rent for 15 years.
Speaker 1:What's the, what's the thought process behind?
Speaker 2:that they just thought it would be.
Speaker 1:Didn't Starbucks do that?
Speaker 2:Starbucks did that on a lot of locations.
Speaker 1:Wasn't Starbucks paying, paying rents? There was like 250 bucks a foot when the market was like 30 bucks a foot, like they were paying significantly above market, like high rents, and then they just like stopped, they closed down a lot of stores.
Speaker 2:They closed the stores, but they still had to pay those rents, they still had lease obligations when the lease expires, the rent, the rent will never.
Speaker 1:That might be hard to replicate.
Speaker 2:Let's just Starbucks specifically. I think it was an O nine market obviously took a dip. Starbucks was still a very healthy company, but they were opening on every corner. There are Starbucks opening across the street, from Starbucks next to Starbucks. They were opening everywhere in the city and eventually they realized they were cannibalizing themselves.
Speaker 2:Now I can have this many stores this close. So they were closing locations and they approached certain landlords and said hey, mr, mrs Landlord, your location is just not profitable for certain reasons. We have eight years left on this lease. Is it OK if we try to sub lease it? Or maybe we could work out some sort of buyout where they'll pay you? Hey, if we offer you a four years rent today, will you let us off the hook? You could say, yeah, great, give me the four years rent. I'll go hire a local leasing broker and retent this property and I'll be, I'll be fine. Or you say, no, I don't want to deal with it. You guys try to sub lease it, but keep paying my rent for the lease term. So if you're buying good credit, you are somewhat insulated. There Got it.
Speaker 1:What about so? Something that I've been seeing a lot of, at least in New York. We saw a lot of it on apartment buildings and I was speaking with a buddy of mine who invests a lot out west and he said he was experiencing it. But I feel like there's a lot of scenarios where the real estate taxes are shooting up on people and it's a very difficult thing for investors to underwrite because they just, in many cases, just don't know the calculation or how the taxes increased. And I'm just wondering, like the net lease space, when you're the landlord and you're just getting your, your check in the mail every month, you may not know what's going on behind the scenes, where the real estate taxes might go from like 50 grand a year to 90 grand a year and it has a good impact.
Speaker 2:Yeah, and I was going to mention insurance insurance as well.
Speaker 1:But you have these costs that these tenants are picking up that are significantly increasing. And how does that play into, I guess, just the overall lease, yeah, the lease, and the merit of the net lease property.
Speaker 2:It's a great point. So, first off, I'm like a more management intensive building where you eat all those costs, your tenants the one eating these costs, which is kind of nice from the landlord's seat, but ultimately it impacts probably the profitability of their business to some degree. It's just more expensive to run businesses today just to build on that. Even like cost of goods, labor, everything comes into play. There's bigger discussions we could have, but specifically real estate tax and insurance are two big ones. The tenants have rights to contest taxes and oftentimes they will and the landlord might have to sign a DACA green that they'll sign off and partner with them to help them achieve that. And then even on the insurance I know Florida and some of these hurricane areas those costs have tripled, quadruple, or if you can even get insurance in certain markets, it's definitely more challenging. But it's on the tenants to figure this out. And hopefully it's a strong enough location, a strong enough credit tenant where it doesn't impact their ability to pay their rent to any degree.
Speaker 3:Are you having? The insurance is a big one even for us now, like frame buildings, like buildings with violations, like insurance companies are like really smartening up and there's nothing compared to what's going on in other markets.
Speaker 3:For sure, but I'm just making a point that even in New York we're seeing it. So like I can only imagine let's take you, imagine, florida. Florida is an obvious one for storms and hurricanes and whatnot. Are you seeing situations where tenants are going back to the landlord's bank? Hey, my taxes were eight and now they're 24,000 a year. Like that changes things, right it depends.
Speaker 2:I mean, if it's a smaller tenant, you probably took some more risks buying a smaller tenant, meaning you got a higher return going in day one. But the tenant may say, hey look, here's the economics. This X, y and Z change. Would you be willing to help? It's not an everyday thing that happens in that manner, but they can. But it's rare. You're gonna either call from Chase Bank or Home Depot saying our taxes went up. They're just gonna eat it. They're obligated to the lease. They're paying it.
Speaker 3:This is very good stuff. Yeah, I mean, I think-.
Speaker 1:Very talk I think for us we kind of are drawn to like well, what's the risk, what's the exposure, what could potentially happen. But I think if you take a step back and you're like the landlord and you're just getting some really nice, easy, consistent cash flow coming in off these things yeah, especially if you're somewhat smart about it- good location, good credit, yeah, and there's like Can take risks.
Speaker 2:sure, I could sell you a 10 cap and there's gonna be options. There's gonna be obvious risk, that's come with it. And if it works out great, You're making 10% return on your money. But you're definitely taking risks to achieve that type of return. And again, just part of us being experts in the space is educating the clients and kind of pointing out everything and saying, hey, I'll show you this return, but here's what comes with it, or you get a much lower return but you could sleep at night and everybody has different buckets they're trying to fill and different views on the world and it's just really trying to cater to everybody.
Speaker 1:So I think it's a good point to transition into the whole 1031 aspect of the net lease market, so like how much of the market is made up of 1031 buyers?
Speaker 2:It's a significant percentage and as New York Velocities down and Velocity around the country's down, there's less buyers out there. There's still some residual ones from transactions that closed six months ago and some transactions getting done. There's definitely less today, but we found there are plenty of high net worth and family offices who invest in that lease now. I think the whole segment is still growing and people are as much as you've heard of it. There's still people that haven't and they're still getting educated. There's both public and privately traded REITs. There's different funds trying to accomplish and fill different buckets, so there's more than just exchange buyers in the marketplace. There's a lot of people that just like this asset class and I think will continue to see it grow.
Speaker 1:And they like the asset class for the ease of management and the cash flow and the long-term credit worthiness of the tenants.
Speaker 2:That's basically what the appeal is right, it's definitely part of it and, as we talked we talked about a little earlier, we're even seeing some foreign capital come in, where they want to get money into the States and invest in the US. But taking on management intensive buildings it's hard right. It requires a lot of work and just paying attention to it and struck it requires a lot of paying attention to a lot of detail and that lease is just a much easier form of real estate ownership.
Speaker 3:And that fund we were with. Two days ago they brought it up.
Speaker 1:Yeah, and you saw, like in Williamsburg I think there's an institutional investor that just purchased not just, but recently purchased a large property there. I mean you're seeing it even in New York City, institutional investors. I think, yeah, there's been a bunch Makes sense.
Speaker 2:And it's all around the country. I mean, I know we're in this New York bubble here, but there's great markets all around the US and it doesn't need to be one of the big major Metro cities. There's plenty of like call them slightly like middle tier markets. But as long as there's good economic drivers, there's good validity to the real estate economic drivers being if the property's next to an airport, the hospital, stadium, just something that's gonna draw people to that local market, create jobs locally and kind of just validate the real estate.
Speaker 1:Yeah, I think it's much more like location, location, location. Oh yeah, once you leave New York City, then New York City most locations kind of just get away with being here in New York. So it's not I mean less so on the retail side.
Speaker 2:Retail is still sensitive, but there's some of that, but it's still a blend of everything. Yeah, and just understanding what you're up against, and I know we're talking a lot about retail, but we're selling medical industrial, like I said, amusement parks, like we're really touching all different types of places you guys hold an amusement park.
Speaker 2:We did what's that to you about? Um, it was with the private equity sponsor who was in kind of growing and buying some different amusement parks during the pandemic and we helped them structure, sell these specs on the real estate to help finance some of the acquisition costs. How much did those sell? For Various price points. Some of them were sold as portfolios and just kind of different buckets. I mean, we're trying to put a net lease on everything we can.
Speaker 1:So I love that. So let's talk about maybe talk about 1031s, which is a huge part of the market, but there's other like. So people obviously want to save their.
Speaker 2:But just to further bill on 1031 exchanges. So I'm sure a lot of people are familiar with 1031 exchanges, but that really what that is. It's through the tax code. It allows you to exchange from an investment property to another investment property and defer the capital gains. So we've had all kinds of people getting out of more management intensive properties. Do 1031 exchanges buy net lease, and it's been for different reasons. Some of it's people who might be in different, different like points in the life cycle and on something more passive. Some of it's even I've dealt with some big owners in New York that don't feel great about the local market for one reason or another and are looking to exit and use net lease as a placeholder. I've had some guys say, hey, I'll go buy a couple good credit tenants, I'll park my money here for a few years and when I think the time's right to enter back in New York, we'll sell these and I'll jump right back in about preserving capital deferring taxes.
Speaker 1:Maybe playing the stepped up basis game that too, for estate planning is huge.
Speaker 2:We've had a lot of people bodies and hold them and kind of keep exchanging and whatnot, and then at some point in time when the routes were gonna stepped up, basis and we've also had two. Just you've seen the generational families that the kids may not wanna be managing. New York multifamily, that's gotta be big.
Speaker 2:It is a big piece, like the kids might wanna be doctors or lawyers or just do something that's not managing real estate. And if you're able to exchange and not pay the capital gains and defer the money and buy an at least property, that's way less management intensive. It's been a great use and the tax savings we provide the clients over the years is tremendous.
Speaker 1:Oh, 100%. Yeah, 1031 is so good. You get more. You know, you have all that extra money that you can use for cash flow.
Speaker 2:Yeah, I mean it's deferring huge tax gains and it's keeping money and reinvesting into the real estate world, but it's a piece of your business too, right? I think about all the exchange buyers that are still exchanging back into multifamily 100%.
Speaker 1:Yeah, 1031 has been amazing. Yep, A lot of the buyers we're dealing with right now are 1031 buyers, so you know it always cycles through.
Speaker 2:For sure.
Speaker 1:Keeps the market moving.
Speaker 2:Yeah, no, it's good for all, for sure.
Speaker 1:Very good for everyone. Yep. So 1031 exchange, you could say, is a tax strategy? Right, it is, definitely it's a tax strategy. We know people that have done it. We've done it in some situations, helped a number of clients manage it. We've done some together.
Speaker 2:We have. Those clients are all happy. I still talk to them. They call, we check in once a year. Nice, it was a game changer for some of them.
Speaker 1:Yeah, the 1031 can get kind of pretty complicated too, with the tax code and just the tax strategies and the basis and all sorts of things Not getting too deep in the weeds there. That could be a good thing to go over at some point in a future episode. But let's talk about other tax strategies. So we mentioned, we touched on this bonus depreciation Sure. So what do we got there?
Speaker 2:So, through the 2017 Tax Cuts and Jobs Act, they added a caveat that any asset that previously qualified for accelerated depreciation would now qualify for bonus depreciation. So a lot of that car washes were specifically mentioned, but also auto service gas stations. So of those types of uses, you were able to take 100% depreciation year one, which is a tremendous savings to offset other gains you may have in your portfolio. They've now since started phasing it out it's 80% this year, it's going down to 60% next year but we've helped kind of Through these tax codes and tax savings Get more ingrained with some tenants, such as car wash operators.
Speaker 2:I know private equities gotten very involved on that side. They've helped with these car wash operators, who was historically very fragmented business where they don't two, three locations. They figured out if we could congregate and get this up to 50 locations. Just the economies of scales and the gym membership model. There's certain strategies they took on the business side, but there was also a huge captive audience looking for these tax savings and all this depreciation offset other gains in their portfolio.
Speaker 1:Can we? Can we give an example of how this works? So yeah, you know, say Someone comes along, they want to get some bonus depreciation, they want to show some some losses against their, their other income their long-term or short-term. Yeah, so say, there's like a car wash for like a million bucks in New Jersey, sure like so how does it work?
Speaker 2:Sure, so take that million dollar example. You have to deduct a portion for land, let's just say 20%, so there's 800,000 dollars there left for the improvements. You'd be able to take an 800,000 dollar right off day one and you bought because you bought a 300 grand. You bought a four million, but you don't a little bit for land but that 800,000 dollar savings is tremendous to set that. Use that to offset other income it becomes an 800,000 dollar loss. What about?
Speaker 2:the debt, the debt is well, that's it too. It's almost more powerful if you put some financing on the property.
Speaker 1:So let's say they put the finance to read 400,000 dollars. I'm gonna take the eight, correct. So let's say they put 700 grand of debt on it. They put 300 down, someone comes to the table 300 grand and all of a sudden they're wiping off 800,000 on their on their active income.
Speaker 2:You might need a hair higher down, but yes, yeah, so.
Speaker 1:But now they have an issue, right? Is there not an issue? Because all of a sudden, their basis is zero?
Speaker 2:So your debt is 700 grand.
Speaker 2:Taking the debt aside for a second yes, you have the debt and you'll have to repay the debt and that that's like any other type of real estate ownership. But the savings today has tremendous value. They just from net, present value standpoint. Think about all the savings today that you might be saving over the next 15 years. You get the benefit of all that today got it. And then when, to your point, when you do sell, you now have no basis anymore but you sell into a 1031 exchange. Maybe you buy so it, maybe you. I don't. I like car wash as an investment there. These places are cash cows in a lot of cases. They make a ton of money and there's some good credit-tending operators in the space now and maybe you like that investment for the long term, or maybe you don't and you sell it into a 1031 exchange into something else at some point in time.
Speaker 3:Yeah, car wash to me is great because I like I actually just do like the business.
Speaker 2:Like I said, they're very expensive to build, but once they're open, it's it's a high-margin business.
Speaker 3:Yeah, and people wash their cars. I mean you, there's no really replacing that.
Speaker 2:Yeah, even if cars if you believe electric cars are taken over the world, you still have to clean them. So play them.
Speaker 1:So okay. So the play is then you did the bonus Depreciation and then you just either sit on the property of no basis there's no more depreciation and you cash flow. It's a mortgage or you 1031 exchange and buy something else, but your basis still carries through to that. So, essentially, that 300 grand that you just put into the property, you're not seeing that 300 grand back. Basically you put the 300 in to like get the $800,000 loss, but then you're you're leaving the 300 in the investment for.
Speaker 2:Probably rolling that on the go forward, but I have to assume most clients in the commercial real estate sector that are spending million dollars of properties are gonna be in the high tax bucket and it's a tremendous savings. You're saving more than the $300,000 you use as the down payment there.
Speaker 1:Yeah, you're saving, at least 300.
Speaker 2:Yeah, it's gonna be more. Yeah, it's. It's a very powerful vehicle. There's been all kinds of People creating funds around this and just high-net-worth individuals, different corporations and a lot of people are in the sector. And you get the same benefits for gas stations if more than 50% of the sales come from fuel sales.
Speaker 1:So there's it's been a nice little boost in certain In this scenario, if you were to sell it Now, you still have to pay the 700 grand back to the bank. Say, you sell it for like a million bucks or one one, even one two, maybe it goes up in value. Okay, we have to pay back the 700 grand to the bank and then, if you're not doing a 1031 and you, then you'll have some depreciation. Recapture the depreciation, you recapture. She basically put all the money back in to the taxes.
Speaker 3:Was that? Yeah, you have 1031. Yeah, there's no other option now or just keep it.
Speaker 1:You put the money in and you're basically saying I'm keeping this property. I mean essentially forever.
Speaker 3:You're gonna cash flow if you're making a lot of money in your personal job or whatever you're doing. You just buy one every year, never pay taxes, and that you turn around you have 10 of them, but it's all cash flow, mm-hmm, you don't have to sell it and it's all savings on today's dollars, not future dollars, which is very meaningful, especially as we go through an inflationary period. Some tree of class just buy these every year.
Speaker 2:There's been several, yeah, and that's. It's been a good boost for our business.
Speaker 3:We're running out of gas stations or Car washes. A lot of new ones being built.
Speaker 2:Yeah, it's just been a lot of new players in the space and we've helped finance a lot of their growth.
Speaker 3:And car washes. I mean, what type of locations do you want those in? I mean that I've seen all over the place.
Speaker 2:Obviously, basically every market needs one yeah right that you don't want them necessarily across the street from each other, but most markets could support at least one car wash.
Speaker 3:And I'm sure you're starting to see these car washes. What about the ones that don't have employees, the ones that are like you? Drive in? You put like a Whatever.
Speaker 2:you scan something I've seen that, yes, just, and you could even to your pointer I think you reference like cost segregation studies. You could go get cost segregation studies on a lot of properties too, if you're not looking for a hundred percent bonus, and you Could still expedite the the scale and maybe get them down to six, seven, eight year schedule verse, your typical. Yeah so it's tremendous savings and then waste offset income.
Speaker 1:So these, these car wash, these are, these have corporate guarantees or these are franchise guarantees, and what kind of cap rates are they trading at? Um?
Speaker 2:everything in between. I mean we're working with with operators with two, three locations. Then we're working with some, some of the largest operators who are publicly traded in the hundreds of locations around the US. So everything in between, the the best in-class car washes are probably in the low six percent range, and now you're seeing some of the smaller operators touching seven. So there's what's a big operator that splash, like mr Carwash, and take five or some of the big ones. Splash is a nice, nice size operator, doesn't? From Connecticut splashes? Yeah, that's pretty good. They're financeable. Yeah, there's. Definitely. Financing is more challenging today than it's been and we're still navigating that space, but we're pounding the pavement and trying to find banks and lenders that that will end.
Speaker 3:So car washes are expensive. There's not a lot to them like. There's like that little space where you go into like watch your car get washed. I guess all the equipment.
Speaker 2:You'd be surprised the equipment is expensive, the buildouts more expensive than you think the water bill the water bills. But that's, that's secondary, it's just getting them opens the some of the largest costs.
Speaker 1:All right, people are buying these. They're buying brand new ones or they're buying ones that are already existing, doesn't?
Speaker 2:matter. It doesn't matter for belongs depreciation purposes, but they're buying both.
Speaker 3:Cool. So gas stations 50% or more goes to fuel Yep Car washes anything like Pepwys and stuff like that or no.
Speaker 2:Those won't necessarily qualify, but some modular buildings too. If it's under, I think, 13 or 14 hundred square feet, you'll get certain acceleration benefits as well. All right, so that's interesting to anyone that makes money, a lot of money, yeah, definitely. More money is better, obviously, and it's an easy way to enter the NetWheelse market and take some huge shelters.
Speaker 3:Yeah.
Speaker 1:Okay, that could be a real game changer, huge game changer For every year, all that income.
Speaker 3:I mean, there's so many different vehicles, like literally vehicles like big cars.
Speaker 2:They can buy big cars. Oh, it's like they think about it.
Speaker 3:Yeah, yeah A lot of this.
Speaker 1:Okay, All right. So then you know, I feel like this goes on more around the country than in New York, but it also goes on in New York. But there's people that go into the NetWheelse space and they know what a tent is looking for. They buy the land or build a building or take over an existing store where there's not a good lease, and reposition and put a much stronger lease in place and then they can basically sell for a much higher value or refinance. So there's people that are making some serious creating wealth in the NetWheelse space.
Speaker 2:Oh yeah, I mean you're, it's mainly developers, I believe what you're talking about. Okay, so there are several developers who will either find good land and lock it up and then start approaching tenants or maybe they have somebody in their back pocket, or those other developers that are out there searching for specific tenants.
Speaker 3:And what about the guys like you were talking about before, like rewriting leases and renegotiating leases, all the values really, upside the location? The piece of paper is huge.
Speaker 2:There's tremendous value in the piece of paper and there are opportunities where maybe you'll you're willing to take the risk on a shorter term lease, while somebody else might not want to take that risk, and maybe you get rewarded and you're able to get the tenant to extend for X, y and Z reasons, or you find a higher and better use for the location. But not everybody wants to be a developer and take that risk.
Speaker 3:Correct.
Speaker 2:So that does create opportunities for people that are willing to take that risk.
Speaker 3:But just it's interesting for us I mean a lot of our colleagues and friends like we talk about triple net is just passive and it's for someone that is a little older, that's looking to retire. But I do like, especially after this conversation, like there's definitely avenues to make those rips that you'd make in multifamily, like you just have to be a little there's definitely ways.
Speaker 2:I think the swings are probably a little bit less just because of the nature of the beast. But yeah, there's definitely ways to make money.
Speaker 1:I was thinking about this last night, just brainstorming about this conversation and the problem with multifamily redevelopment and where people make those big rips. It's so heavy to get from point A, from like A to Z, Like repositioning delts yeah. I mean here, but imagine this is elsewhere too. You have to buy it, you have to get vacant units, you have to renovate and put in significant amount of capital to renovate, and then you obviously get the higher rents and you have a higher income.
Speaker 1:And, yeah, you go back to the bank or you go back to the market and you try to sell the same kind of cap rate that you went into it at, but you increase the rent rule so significantly that you created all this value, and then you can create wealth through multifamily redevelopment or even ground up development, however it may be, and net lease just seems so much simpler.
Speaker 2:If you're smart about it, yeah Well it seems you can be and you're also out of New York. I know New York's impossible to get anything done. There are certain markets that are much more business friendly.
Speaker 3:I have a buddy. He can make a million dollars just by getting the phone. I have a buddy in.
Speaker 1:Colorado that I think he found like a true value hardware store. It was a hardware store.
Speaker 2:Yeah, I see this.
Speaker 1:And I think there was like two years left on the lease and he went in, he put it under contract and he renegotiated with true value and, I think, put like a 20 year lease on it or something, and maybe he bought it at like a seven cap or an eight cap because it was like a short term left on the lease and I think he thought he could resell it for a five or a six. And I mean, I don't know if he executed on the dealer or not, but I remember him telling me that he was going to make, like you know, over a million dollars in profit just by rewriting the paper.
Speaker 3:Let's just talk about the one that happened down the street here, right, so Crown, right, huge, huge, huge retail office players. None of the big things you said they bought something on Fulton Street right and they put a Chick-fil-A in. They bought it for 25 million, which is a lot of money. But whatever it's 25 million, how much does it cost to build a Chick-fil-A with like a roof, like they did over there?
Speaker 2:I mean in New York. You guys might know that the metrics better than I am sure was costly, but regardless they got the best in class tenant and maybe they I don't know the whole chain of events of house. Maybe they had Chick-fil-A in their back pocket when they were buying this they had them, they knew they had somebody right. They had. They saw an opportunity here where, if we could retent at this and put somebody in here on the longterm lease, there's tremendous value in what they made.
Speaker 3:They put Chick-fil-A in, they paid 25 million for the real estate. They built the building.
Speaker 1:I'm sure they did right. Is that how it?
Speaker 2:works, you build. Yeah, you probably built it out for that tenant or they have significant TI and then free rent periods and everything else, and then longterm lease.
Speaker 3:It's not like high end right, Like it looked really nice, I'm sure it cost a fortune. You're not putting like top of the line, like fixtures and something you do have to build. Sure that it costs a fortune, all right, so like five million bucks. Well, they.
Speaker 1:It's. What's interesting is they bought it for 25. Okay, Then, a few years later, three, four years later they refinanced for 29.
Speaker 3:So that's there you go. The 25 to the 29 is probably the build out. Four million dollar build out yeah, that makes sense to me, I guess so basically got all their cash out of the deal. They put an elevator in that they own the building for free at that point. Okay, fine Right. So that's a major assumption, but usually a cash out refi. You're taking out your purchase and the renovation costs.
Speaker 1:I forget what kind of financing they they they got when they purchased it, but say they bought it for 25 and they got a loan for like 20 and then they refinanced for 29. So they got, they got all their money back out of the deal. Fine, resumably Fine. Then, a few years later, I think, a big institutional investor came along and bought it, guessing for like a five cap or something.
Speaker 2:Probably less right.
Speaker 1:Yeah, probably less In fact the numbers and but yeah it's, but they bought it for 38 million, so they, but those guys were playing developer.
Speaker 3:Yeah.
Speaker 1:If they had it at the time or not.
Speaker 2:That that's a big check to write. There's not so many people could do that. And here we are in New York talking on the most grandiose of scale and the. Us, but in smaller markets around the country you're able to accomplish the same thing if you have the right real estate.
Speaker 3:Yeah, a guy. A guy made a killing on the like run from in Connecticut there was a, a Chipotle and Darian, I remember it, went in and I know that developer made a killing Like he got Chipotle to be into that situation.
Speaker 2:You get the right timing at the right location. People will pay big value for that.
Speaker 1:Yeah, around the post road and Darian, that's so a lot of these guys are building relationships with tenants, trying to figure out, like what the tenants want, like where they want to be. Then they're like scouring the market to find the properties that they can essentially lock up and get the tenant to agree to use, and then that's what developers do, and then they're making a spread on, and there are.
Speaker 2:Yes, there's a lot of money to be made. There's obviously risks too, where you're signing a lease today and it might not open for two years and a lot could change in the marketplace at any given point in time. I know it wouldn't. Today might be a decent point to enter the developer game, but think about a year or two ago, where you were expecting your exit cap rate to maybe be a hundred basis points less than reality is today For sure.
Speaker 1:So Cap rates have moved a lot in New York.
Speaker 3:So a lot, a lot. If you're doing this to try to make money, or a developer, or you're selling that reposition triple nets, having a relationship with these tenants is absolutely massive right, like where you can actually call up like Wharton properties, like he's obviously retail royalty, but like everyone knows yeah he has his relationships and like he was able to place tenants right, and that's the value right. It's a piece of paper.
Speaker 2:That's it. You choose the right real estate with the right relationships and you get the right tenants and there's tremendous value. But there's obvious risks and developers have had a really good run in the last called almost 15 years. But now the market's more challenging. It's hard to predict what the world's going to look like in two years today from two years from today. Then it was four or five years ago when everything was trending in the right direction. The market felt healthy, even like the pandemic changed the landscape a little bit. Where pre-pandemic everybody was had to be experiential real estate and that was the buzzword and everybody was trying to target that. Then the pandemic hit and they was leaving their house and you had to find properties with drive-throughs and properties that were less experiential that you could keep to yourself.
Speaker 3:Do you see any cap rate compression tool? Let's say I buy like I don't know, like a dollar store or some small time business for a 10 cap, because whatever they're not the credit, it's not amazing. But then all of a sudden, why I own it a bear corporation comes and gobbles up that company and now all of a sudden the credit is much better.
Speaker 2:I've seen a lot of people make a lot of money in that.
Speaker 3:So that's more of my.
Speaker 2:I want to recommend buying smaller credits, but I've seen it several times over where these small guys will get gobbled up by larger, bigger credits, and it's a windfall for the land price, like a dollar tree gets bought by a dollar general or something. Right, I've done a sold a portfolio of gas stations several years back and 7-Eleven ended up buying that company, so that was a huge credit enhancement for everybody that owned that real estate.
Speaker 1:So that's like a full cap rate.
Speaker 2:So what kind of cap rate was that at the beginning versus the end it was probably a two to 300 basis point swing in value. That's insane. Just on the credit changing.
Speaker 3:Wow, how many times can you really do that? That's just being lucky.
Speaker 2:Yeah, it's not. Nobody knew that was going to happen or expected that to happen. It's just how it played out.
Speaker 1:I bet there's some insider trading type of stuff that you could do in this space where maybe you know the tenant and you can get them to overpay for the rent Right there.
Speaker 3:That's retail to nutshell.
Speaker 1:What's that? Insider trading?
Speaker 3:Being able to replace tenants and getting to hey, go here, Don't go there, I own this, but go here. Yeah, I mean that's probably real.
Speaker 1:Yeah, and then drive down. That's frowned upon. Yeah, maximize rent, drive down the cap rate, make a spread.
Speaker 3:So since we're obviously all in New York talking about this and I know you were involved in some deals in Good Brooklyn can we touch on that Williamsburg deal you brought up a few years back?
Speaker 2:Yeah, how did that work? That's prime real estate it is. It was on White Avenue. It was really kind of a cool deal.
Speaker 2:I love the seat where and I pride myself on trying to be creative and I didn't touch much on this yet, but I work on a team with 100 people and everybody brings different tools to the table. I love the atmosphere we're in. There's a lot of smart real estate people in the room and we can bounce ideas off each other and if somebody's doing something creative, we share it with the group. We have weekly meetings where we share ideas and problems and we try to problem solve together. But I think just being around these people and hearing ideas and creating my own ideas.
Speaker 2:On that specific example, there was a nightclub there with a couple different leases and it was a little bit of a funky structure day one and I know that they had opinions of values from several of my competitors and we came in with kind of a different strategy and a different way to position the asset and we said why don't we just ground lease this? We'll make it triple net. We just put a ground lease on it. You control the real estate and it really added a tremendous amount of value, making a triple net. There was an exchange buyer who bought it. They paid a premium for it and they bought the ground lease. They bought the ground lease in a 1031.
Speaker 2:It threw a 1031 exchange Amazing. And the ownership, I think, made an extra million and a half dollars from this setup than they would have made on anybody else's proposal.
Speaker 1:So it was just coming in and you mentioned they still own the leasehold interest.
Speaker 2:They still own the leasehold interest and we locked it in the fairly cheap rent. So they have flexibility to do some other things with the property over time.
Speaker 3:And this is obviously prime, prime prime real estate.
Speaker 1:A plus real estate. So it's only to do this yeah.
Speaker 3:So not only they have the A plus real estate, they're also able to make money on doing some sort of triple net lease. So they got a premium on selling the ground.
Speaker 1:There's no risk there.
Speaker 2:They're in the money already.
Speaker 1:They sold the ground, but they're still renting out.
Speaker 2:They still have rent obligations but they have flexibility to change. They use and do certain things there Different obligations on the ground, they still make money on the business.
Speaker 3:So this is an opportunity, just with landlords and on these warehouses in Prime, williamsburg and Green Point or Queens, where they can put a tenant in and you come along with your team and you triple net lease it, and I mean that's that's.
Speaker 2:that's big, it's adding value versus if you put multi tenants in there and there's a lot of management. It's kind of just a different buyer bucket how do you do that?
Speaker 3:Because people don't pay a premium. Find a warehouse in Prime Williamsburg. That's all I'm trying to do, just to take a step back.
Speaker 1:So the guys that sold the ground lease they're still renting out the property and collecting rent from the tenants that are there. They just have to pay a rent on the ground lease. Correct, Is that right? Correct? Okay, so they're still making money on the property.
Speaker 2:They're. I think they've changed the uses a little bit, but I'm sure they're still making money?
Speaker 1:Is the leasehold interest something that's sellable as well?
Speaker 2:I mean yes and no, Probably because it's in such prime real estate and somebody might want just to have those rights. But it's definitely more challenging, hard to the finance. I've done some leasehold transactions and leaseholds will qualify for 1031 exchanges if there's over 30 years a term Like. There's definitely some nuances and just to take note of there, but it's. There's not a huge market for leasehold buyers.
Speaker 1:Okay, what other kind of like funky deals or creative deals like structures are going on out there?
Speaker 2:Well, I like real estate, I like being creative, but from my seat I'm hitting a ton of singles and doubles, like it's a lot of. What we do is a volume game. Yeah, it's a relationship game. It's just forming relationships with tenants and landlords and developers and you do right by these people over time and they come back to you Like a big part of my business is referrals.
Speaker 3:That's how we stay in touch. For sure, we've known you.
Speaker 2:I don't even know how long now, but we're constantly talking and you guys have. Hey, this person's looking to fulfill X, Y and Z exchange. They want to learn more about Netlease. Like, I'm not forcing this down anybody's throat, but it's an option and I think a very viable one for people looking to kind of shelter some income and defer gains and take some different tax strategies. Definitely is yeah.
Speaker 3:No for sure Anything else you want to go over? No, I mean listen, I think we've heard a lot of podcasts and discussions about triple net. It's always so entry level. Like Sally Jo sold this building in Brooklyn and bought a CVS, and it's nice to hear from you guys. Obviously, I think you're probably the most active group in triple net in the country, or, if you're not number one, you're definitely close, but you're probably number one. I think we are Okay. You're probably number one. I'm not a floater on boat.
Speaker 2:but yeah, You're number one.
Speaker 3:It's good to get into, like the meat and potatoes, like how do people make money? Where's the opportunity, like what's good, what's not? It's. There's definitely a real aspect to triple net to make money and there is.
Speaker 2:It's cool, it's still not such a household name as much as you guys here than know it just being in the commercial real estate space. I'll go to a party and tell people I'm in real estate and be like, oh, could you sell my house? Like it's still like. I say that least and people will like stare, my father-in-law is a good example here.
Speaker 3:I mean, he owns commercial properties for his business in Connecticut and he just did a nice 1031. He did not do triple net, but I brought this up to him and I think he was definitely new to him and we still have calls all the time with people that own multifamily that do not know what you say, google and and and you know, just Google it.
Speaker 2:And big orders to Google 1031. Yeah, google and people with 50, a hundred million dollar portfolios that just didn't even know this was an option or never considered it, and now maybe they a different point in time that will in the look at it and it makes a lot of sense.
Speaker 3:It makes sense. I mean this was a good conversation and the tax benefit that's huge too. I mean I've I've heard this a lot, obviously with the car wash. I mean if you're making a big income, I mean it's, it's, it's like a no brainer, any kind of income. I shouldn't say big. But if you're making some of these, some a lot of our clients and friends are just in huge tax brackets and yeah eliminates that. I mean I know people that build buildings just so they don't pay taxes.
Speaker 1:Do you have to be a real estate professional to get those benefits?
Speaker 2:Yes and no. I mean talk to your, your advisors. There's different ways to bucket it versus passive and active losses, got it and but, yeah, I've seen it structured several different ways.
Speaker 1:All right, all right, cool. Anything else you'd like to go over?
Speaker 2:No, I mean, it's just kind of, it's going to be an interesting year, I'd say I think we'll see what it holds. And as much as I'd love to tell you I know, but I've been wrong several times over and I don't, anybody tells you they know, they, they don't.
Speaker 1:Are people being forced to sell Netleys properties? Like on like here in New York we're seeing a lot of loans coming due and the values are down, with cap rates being higher and or just with higher interest rates the owner can't refinance. It's a cash in refi. So a lot of people's feeder kind of being held to the fire at this point. And are you seeing the same thing in the Netleys side?
Speaker 2:Not a ton, definitely a little bit, and I've had more discussions today where people had loans and they're coming due. That's good. And I'm sure you're you're seeing in New York, these banks don't want the properties back.
Speaker 3:No, they also want their money back. The banks want their money back.
Speaker 2:They want their money back, but they're a lot of times they're extending. They're as much as they're saying they don't want to. They're working with they have been. A lot of people think that's. That's about to stop. We'll see. Obviously, rates are higher today and it's unfortunate. And part of our job's having the tough discussions right, and that's not all rainbows and unicorns. And I have to like talk to some of these clients and say, hey, you had a 70% loan on this property. The rate was 5%, Now the rate is 7% and with the debt service coverage ratio, you might have to come out of pocket a couple hundred grand to make this work, and it's. It's a difficult discussion and you have to be real with people. You have to give them the right advice and I think that's why people like us and work with us, Cause that's what we do. Cool question, though.
Speaker 3:On a typical 1031, like what kind? Of what kind of LTV do people usually do? Are they putting down like 25% or is it more like conservative 50% down?
Speaker 2:I usually need at least 35% down. Some of the banks have up that to like 40% recently.
Speaker 3:Even when rates were we're talking about a few years back I'd say 35 has gone to the comfortable metric.
Speaker 2:Now that's good, that's conservative.
Speaker 3:I mean we, we, we, we we we saw a ton of 25% down deals there was there wasn't a lot of that game done in that lease and it shouldn't Good yeah.
Speaker 2:And I think that's why there was other brokers around the country would say hey, I got this buyer 20% down 20%. I think about zero of those transactions worked out.
Speaker 3:So maybe that's why you're, maybe that's why you're getting less calls about people having issues with banks.
Speaker 2:Yeah, and then we try to educate people properly, show them the risks, show them the rewards, and we're heroes and advisor. And just cause it's somebody bought a property for me 10 years ago. They still call me all the time. We're friends, we talk and that's one of the aspects I love to this business. I have so many cool people in the industry that you get to meet and interact with and learn about their lifestyle and their family, and just just learn from their life lessons.
Speaker 3:Yeah, I have a lot of clients that's to love you, for obvious reasons, definitely yeah. So it's good. It's good to hear, it's good to see and we appreciate it no sure have me guys
Speaker 1:100% All right. So Russ Lockler, N and N Prom. Thanks so much.
Speaker 3:All right.
Speaker 1:All right, thanks, guys, thanks.