In this triple net lease case study, we explore a real-world scenario including the advancement of a build-to-suit industrial residential or commercial property for a leading drugstore chain in Colombia. By analyzing this circumstance, you will acquire hands-on experience evaluating a triple net lease (NNN) structure, a typical type of lease in commercial property, where occupants are responsible for residential or commercial property expenses. The job involves the acquisition of land in a tactical place and the construction of a residential or commercial property tailored to meet the tenant's functional needs, offering a strong example of a development-focused NNN offer.

Practice makes best! This is a real circumstance based upon actual residential or commercial properties and circumstances. Names and places have been changed for confidentiality reasons, however the principles are real-to-life.

Each case study shared in this series mirrors real life situations, either in regards to the types of deals you will look at in different functions or the types of modeling tests you'll be required to perform 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 recent graduate of the University of Central Florida (UCF) with a degree in Business Administration, focusing on Real Estate. While studying in Florida, you developed a keen interest in global property markets, especially in Latin America. This interest was sustained by your family ties to Colombia, where you invested numerous summertimes checking out relatives and witnessing firsthand the quick urbanization and development in cities like Bogotá and its surrounding locations.

Upon graduating from UCF, you worked in the banking sector in the U.S., gaining valuable experience in financial analysis and financial investment strategies. However, your passion genuine estate led you to join a little real estate financial investment LLC, where you quickly advanced to a role that included managing monetary modeling for various 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 professional experience and deep understanding of both the U.S. and Colombian markets, you are ready to embark on your very first realty financial investment promo in Colombia, in an area you know well from your household connections and routine visits. This job involves developing a build-to-suit business residential or commercial property for lease to a significant pharmacy chain that is broadening rapidly in Colombia and beyond.

Time to Make Your Mark

After years of sharping your abilities and building a reputation in genuine estate financial modeling, you're ready to step into the spotlight as a real estate promoter. With a wealth of experience behind you and a deep connection to the Colombian market, you're determined to discover an investment that guarantees long-lasting, stable returns-one that can act as the cornerstone of your new endeavor.

As you start your search, you reconnect with brokers who focus on retail realty in Colombia. It's not long before a former colleague connects with an interesting opportunity-a land advancement job in Chía, Cundinamarca, customized for a significant pharmacy chain, BioMedica. The task in question has a strategic location considering that the roadways around the lot are being expanded, which will produce more automobile traffic, and strong occupant appeal catch your attention instantly. the potential, you decide to dive much deeper, carrying out a thorough financial analysis to figure out if this might be the flagship financial investment that sets your course to success.

The Opportunity

The job involves getting a prime piece of land in Chía, Cundinamarca, and building a build-to-suit commercial residential or commercial property specifically tailored to the needs of a leading pharmacy chain. The drugstore has a strong brand presence and is broadening aggressively in the region, making this a highly appealing tenant.

This task is particularly engaging due to its customized style to satisfy the particular needs of the Drugstore, our tenant needs include an area with parking space, close roadways and drive through, to ensure ideal functional efficiency and consumer availability. However, the financial characteristics of this investment need cautious consideration. For instance, while the lease agreement provides a rental increase rate throughout the base term and renewal options to hedge versus inflation (IPC).

To make a notified choice, it's vital to design the forecasted financial efficiency of this advancement and identify if its long-lasting economics align with your brand-new firm investment method.

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 (consisting of land value): $45/SF.
• Land worth: $18/SF.
• Year of building: 2024.
• Lease term contract: 15 years. Option: 5-year choice renewal.
• Rental increases: Colombian IPC (customer Price index) Linked.
• Lease type: Triple Net Lease (NNN) - The property manager will provide an in-depth breakdown of these costs each year, and the occupant will reimburse 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.
• Property tax: 1,946 USD/Year.
• Accounting: 500 USD/Month.
• Capital Reserves: 0.5% on the worth of the building, scheduling proportionally every month.
  
  General Investment Assumptions
  
  - 10-year analysis period.
• All-cash purchase (i.e. no financing).
• All running expenses are paid by the tenant.
• No capital investment over the hold period.
• Initial cap rate based on https://latamcaprates.colliers.com/.
• Reversion cap rate is 50 bps above the acquisition cap rate.
• Selling expenses 100 bps less that the market price. 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 underwrite this build-to-suit single-tenant net lease (STNL) job. This model is particularly created for single-tenant, net lease residential or commercial properties and includes functions that permit you to underwrite development jobs from acquisition through stabilization and disposition.
  
  Answer the Following Questions for the BioMedica Project.
  
  - Is the development expense per SF above or below replacement cost and by just 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 multiple based on the projected money flows over the 10-year hold duration, and how does this metric align with your financial investment requirements?
  
  Conceptual Questions
  
  - Evaluate the effect of the lease structure, including lease escalation clauses, on the net present worth (NPV) of the investment. How does this impact the overall IRR?
• How does the place's projected development and car traffic effect the financial investment's capacity for long-lasting success?
  
  Extra Credit
  
  - Partnership Model: Assume you generate a local financier to contribute 95% of the needed equity while your share it's the staying 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 staying capital. Calculate the IRR and equity multiple for both you and the investor.
• Sensitivity Analysis: Conduct a level of sensitivity analysis to demonstrate how changes in crucial assumptions, such as cap rates, lease 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 kind of lease is utilized in this case study?
  
  This case study includes a Triple Net Lease (NNN) where the occupant compensates the property owner for residential or commercial property expenditures, consisting of taxes, insurance, and upkeep. The lease also includes IPC-linked rental increases and a 5-year renewal alternative.
  
  Where is the BioMedica project located?
  
  The task is situated in Chía, Cundinamarca, Colombia at Calle 2 # 12-24, a strategic area expected to benefit from roadway growth and increased car traffic.
  
  What are the main development and monetary assumptions?
  
  Land expense: $620,000
  
  Closing costs: 4.5%
  
  Development expense: $843,566
  
  Approved lease rate: $14,355/ month
  
  Lease term: 15 years with 5-year alternative
  
  Rental escalation: Linked to IPC
  
  All-cash purchase; no funding used
  
  What model should be utilized to underwrite this case?
  
  The case must be financed using the A.CRE STNL Valuation Model, specifically designed for single-tenant net lease advancement and investment scenarios.
  
  What types of return metrics should be calculated?
  
  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 impact the NPV and IRR?
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  The triple net lease with IPC-linked increases makes sure foreseeable and growing cash circulations, enhancing both NPV and IRR by hedging inflation and lessening property owner expense threat.
  
  Why is place a crucial factor to consider in this case?
  
  The residential or commercial property's place in Chía, a growing area with planned infrastructure improvements, improves its long-term potential, tenant retention, and appeal to future purchasers.
  
  What presumptions are required for the extra credit collaboration model?
  
  Assume:
  
  Investor contributes 95%, you contribute 5%
  
  Investor gets a 9% preferred return
  
  Remaining money flows split pari-passu You'll then determine IRRs and equity multiples for both parties based upon the waterfall structure.
  
  What does the level of 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 numerous, helping assess financial 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.