Efficiently Financing Single-Tenant NNN Properties

by Gabe Gonzalez

The increased capital dedicated for commercial real estate has led to cap-rate compression on most real estate assets, which has made it very attractive for owners to sell.  The profits from these sales has made the 1031 Exchange program popular once again as sellers are searching for like-kind assets to own in order to avoid the capital gains tax, which is now nearly 24%.  Single-tenant NNN properties have since become a very popular investment vehicle in which to park money.

Single-Tenant NNN PropertiesMCA has several clients who specialize in developing single-tenant NNN properties in a programmatic system and who then sell these properties on an individual basis to those who seek tax benefits and stable cash returns.  The tenants for these properties are typically investment-grade credit, which allows for aggressive financing.  These developments are relatively uniform in regards to construction costs as well as a predictable construction timeline.

As an investor, these properties require minimal management with the tenant responsible for all taxes, insurance, and repairs.  These tenants are usually on long-term leases, allowing for surety of cash flow.  They are also very liquid assets that can be sold and/or re-tenanted quickly.

As a tenant, companies prefer to sign leases rather than to own real estate, as the lease can be accounted for as an expense (lowering taxable income) along with improving their balance sheet since there is no debt required to owning the real estate.

Bank debt is the most prevalent form of financing for single tenant development deals, given the low cost of funds coupled with flexibility of repayment.  However, we all know that it takes the same amount of work to obtain a $1MM loan or a $15MM loan.  Providing all the credit due diligence and negotiating commitments can prove to be a time-consuming feat.  While these developments are relatively straightforward, going to a bank for each development can prove to be an inefficient strategy.

MCA has been successful in structuring various Guidance Lines of Credit for merchant developers.  The Credit Line is attractive since the borrower’s credit, background, and experience are vetted once at the beginning.  Once the lender begins to feel comfortable with the borrower, the lender can focus strictly on the real estate at hand.  This has proven to be an efficient process with land contracts that need to close quickly.  Even if the borrower doesn’t have a signed lease, the line can be structured in a manner that lowers the lender’s initial exposure by having the borrower fund all the equity at closing.  Once the lease is signed, the lender can fund 100% of the costs and restructure the capital stack appropriately.

MCA has closed over $100,000,000 of Guidance Line transactions for NNN properties over the past two years and is well versed in this area.  MCA understands the nuances of bank underwriting and can advise clients on the appropriate structure.  For more information about Guidance Lines for commercial real estate, contact any of MCA’s Senior Directors at www.metcapital.com.

Posted on by Scott Lynn in Commercial Real Estate Finance 2 Comments