Financial Resource

retail, industrial, bank branches, pawn shops, 7-11s, you name it — all single tenant.
Simon: On the seller side, it’s the Eckerd’s and CVS’s that are popping out of the ground. If you can get with a builder that’s doing those, then you might be able to get your arms around a newer product.
McDonald: All properties are sought after for 1031. I think that what typically separates it is the size of the 1031 buyer in terms of how much money they have to reinvest. On a typical bell curve, there are just a lot more 1031 people who have smaller dollars — million to million — to invest. You have a large volume of smaller retail properties, such as drugstores and fast food restaurants. If you put it in a larger perspective, retail has the most transactions, but it’s not as high because industrial and office tend to be larger deals.
Hipp: It used to be mainly retail, but now there is a lot more office and industrial. But I’d still say retail because it’s the most produced product out there — like a 7,000 square-foot Advance Auto or a 3,000 square-foot video store. The most sought-after property is any pure triple net property with reasonable or good credit behind it and rental increases. More than ever, I’m seeing buyers who have to buy something other than what they had hoped for and at yields lower than they had expected.
Sturm: The single-tenant net lease, good-credit, well located properties are what’s really selling most today. We do a lot of retail, and it’s what we classify as the minimal management properties. The best-selling ones we see currently are passive real estate investments, where the owner just gets a check on a daily basis.
McCabe: There are a wide variety of sought-after properties for 1031s. I’ve seen everything from large industrial complexes that are broken down and the typical semi-regional shopping center to gas and oil interests and multi-tenant office buildings. It almost depends on what the originator can find. I’m seeing a significant number of multi-tenant product, i.e. office buildings, medical facilities. There are too many inexperienced dollars chasing too few good deals.
SCB: How hard is it to find properties?
Dwoskin: The better properties are very hard to find. There are a lot of lesser credit, specialty type buildings, things like net-leased franchisee restaurant properties — those are always readily available. The harder things to come by are leased properties that are significant assets, such as warehouse distribution facilities, office buildings or well located retail facilities that are leased to investment-grade credit tenants. Over the last several years, most of the high-credit big-box users, like Wal-Mart, Target, Costco, Home Depot and Lowe’s, have decided that they no longer want to be tenants if they can avoid it and want to own all of their properties. So those deals are evaporating; there are very few, if any, in the marketplace. So what’s left of the investment-grade credit deals is coveted, and people will pay more for them.
Hipp: Properties are not hard to find; it’s hard to find something that makes sense. It still continues to be a market where, if you see something you like, you’ve got to go after it.
Shephardson: We’re very niche-focused and work in two primary sectors – 90 percent of our business is in the restaurant arena and the other 10 percent is just general retail that includes drugstores, banks and convenience and gas stations. We’ve found that because we’ve been in the business for so long and know so many restaurant operators, and because we have a very strong acquisition business in our origination efforts, we don’t have any challenge finding product.
SCB: Where are people looking for property?
Domb: To the 1031 investor, private ownership is a big factor, so local properties would be key. Credit and the type of real estate are secondary or tertiary considerations. The 1031 investor is hard-pressed to find quality investments.
Swanson: We typically deal with clients in the million to million range and above, and the area doesn’t seem to matter, although obviously they’re not buying a lot of property in Louisiana and Mississippi. The driving catalyst behind the growth in the net lease market is the fact that the investor can move across state lines and not be relegated to his own backyard.
McDonald: The product is spread across the country; there are certain areas for different product types. Florida and the whole Southeast are big growth areas and so are the western states. Office and industrial headquarter building deals are being done all over — they tend to be in the distribution hubs, such as Memphis or New Jersey.
SCB: Are TIC structures still on the rise?
Swanson: TIC structures offer the individual investor who doesn’t have million to million an opportunity to jump in, so that’s really propelled the market growth that we’re seeing.
McDonald: They are certainly on the rise. In 2001, they did about 0 million in equity and in this year, they’re expecting to do billion of equity — and that’s just on the securities side. So there is obviously a huge demand, and that ties into the fact that the majority of 1031 buyers have less equity and TICs allow them to have somewhat of a passive investment. So it’s clearly a product that there is substantial demand for.
Hipp: They are becoming a very popular vehicle and much more publicized and well known. There are a lot of people out there with 0,000 to 0,000, and it’s hard to buy something without taking on a lot of leverage. They would much prefer to partner with a group of others to buy a more quality asset and let somebody else worry about the management.
Hipp: The TIC market is certainly becoming more popular, and I think they serve a purpose. But when people start buying properties with interest-only loans so they can cash flow, I think it’s a double-edged sword because when that loan comes due in 5 years, they’re going to be out to the market looking for debt in a different interest-rate environment. I’m not sure they realize exactly what they’re buying.
Sturm: We think the TIC structure is really the future for passive real estate investments. The baby boomer generation as a demographic group just turned 59 and a half, and it’s not long until their 401K plans are going to be available to them to start pulling down money on a tax-deferred basis. But what we’re finding is that the quality TIC properties that are investment-grade are able to attract very good financing right now. We’re able to get long term fixed financing in the 5 to 6 percent range, while the 1031 or net lease properties we’re talking about have been financed in the 6 to 7 percent range.
Shephardson: TICs have wonderful application in the larger 1031 arena where you are selling a pool of assets or you’re going to sell one large asset at million to million and you want to syndicate it amongst many buyers. So the only thing that’s holding the TIC market back is the potential ruling on whether it’s a real estate product or a securities product. We expect that we’ll be doing TICs sometime in the not too distant future because it expands the buyer’s universe.

by Susan H. Fishman

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