McDonald’s in Fridley Shopping Center, Minneapolis, where one California-based 1031-exchange buyer needed to look to close a deal. | Courtesy Colliers International

The Value of “Coupon-Clipper” Properties

Carrie Rossenfeld Retail

A team of Irvine, California–based retail investment brokers from Colliers International, faced with an almost zero supply of realistically priced and available in-state properties for exchange buyers, has gone out of state to negotiate the sale of a single-tenant property, a McDonald’s Restaurant in Minneapolis, which closed for an aggressive cap rate of 4.12 percent (the price was not disclosed). About a month ago, the same team negotiated a similar deal with a California buyer for a Discount Tire deal in Alpharetta, Georgia, with a record cap rate of 4.4 percent – the lowest in the history of the tire chain.

Both deals demonstrate why California investors have to look throughout the country now for properties that Eric Carlton, EVP, retail services for Colliers International’s NNN Group, calls “coupon-clipper” properties – single-tenant, triple-net-lease assets where the landlord has virtually no maintenance or upgrade responsibilities. Carlton and Colliers’ Jereme Snyder represented the unidentified California private investor in the 1031 transaction at the grocery-anchored Fridley Shopping Center in Minneapolis, for which six back-up offers were tendered.

McDonald’s holds a 15-year absolute NNN ground lease on one of the shopping center’s outparcel pads, with options to extend. Like many California investors in the same situation, this buyer was racing an IRS-imposed deadline to acquire a property valued higher than the property he had sold some months earlier in order to avoid having to pay capital gains taxes.

We spoke with Carlton about why these coupon-clipper properties are in such demand and where California buyers are going to find these deals.

SoCal Real Estate: How would you define “coupon-clipper” properties?
Carlton: These are properties where the owner has literally no landlord responsibility: the tenant pays the taxes and maintains the property – you just get your check every month. The buyer was an exchange buyer from L.A. who wanted a best-in-class coupon clipper. They wanted a McDonald’s, and the price point for this asset was in line with what they were looking for—under $2 million, while most new McDonald’s are over $2 million. Three or four years ago, Southern California buyers only wanted to buy on the West Coast or less than an hour flight away at most, but because supplies have gone down, these buyers are going anywhere in the country now. They want a certain lease structure that’s NNN – some deals are double net, not triple net, where the landlord has to maintain the roof or HVAC unit. Buyers really shy away from this.

How are investors changing their search strategies for these properties?
They’re using technology and the information at fingertips, and they will go find a best-in-class tenant: McDonald’s, Chase, Walgreens – depending on what they like. They find what they like and then find what’s available nationally. Between technology, the information at their fingertips and our large national brokerage national network nationally, they can do this a lot easier than they could 20 years ago.

How do you see the supply of NNN properties shifting in the coming months?
It goes in waves. Supply was much greater in Q3 and Q4 2017. Sellers were bringing properties to market because of the interest rate movement and expected inflation. Prices softened and the cap rate went up. But that supply got sucked up. In the last three years, there have been a lot more buyers than properties available. Baby Boomers are using these properties as investment vehicles and scooping up everything available. Supply should stay relatively lower than demand over the next three to four years.

What else should our readers know about NNN properties?
True coupon-clipper triple net deals are really mainstream equity vehicles vs. the bond market and other investment vehicles. Between technology and having information at their fingertips, owning something in Minnesota vs. California is not as difficult as it used to be 20 or 30 years, and it makes a good retirement vehicle.