There’s no shortage of 1031 exchange buyers, but the net-lease deals they prefer can be difficult to find in California, particularly those with adequate yield. This situation has prompted many exchange buyers to go far afield in order to locate these deals.
A team of Southern 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 again reached out of state to negotiate the acquisition of a single-tenant investment property, this time the first-ever sale of a newly opened Dog Haus asset near Middle State University in Murfreesboro, Tennessee. Terms were not disclosed, but the capitalization rate was 6.9 percent.
This is the first Dog Haus Restaurant site, located adjacent to the state university campus, to be sold in the entire nation. The brand is one of the fastest-growing casual-dining chains in the U.S.
Colliers EVPs Eric Carlton and Jereme Snyder, based in the firm’s Orange County office, represented the unidentified California private investor in the transaction. The team also helped facilitate a new loan for the buyer and monitored every step of the escrow process to ensure a timely closing.
Carlton and Snyder closed a similar deal last month in Alpharetta, Georgia, a fast-growing suburb of Atlanta, where they negotiated a 1031 exchange purchase of a still-under-construction Discount Tire store, setting a record in process. The 4.4 percent cap rate was the lowest in the history of the Discount Tire chain. The buyer was from California.
SoCal Real Estate spoke with Carlton about what California investors are doing to find net-lease transactions and the advantages to investing in markets outside the state.
SoCal Real Estate: With net-lease deals being so hard to find—and having so much buyer competition—what are California investors doing to find these deals?
Carlton: Along with broker relationships, they have to either go find what they like or send them off-market deals they also might have. Technology and access to information have made the process a lot easier for buyers than even 10 years ago. Most net-lease deals are accessible, and with the usual website portals and marketing sites, it’s easier than ever to find deals across the entire country. West Coast and California buyers never wanted to be farther than a one-hour flight to an asset, but that has changed.
Why are triple-net deals in Southern California especially difficult to find?
There’s little turnover, high barriers to entry, and overseas money is pricing these deals very high, a lot with over-list price execution.
What are the advantages to buying net-lease properties in other markets?
Compared to California deals, there is usually a higher yield spread in going outside California, anywhere from 50 bps to 150 bps for a similar deal and lease term. Plus, other states offer tax-free incentives and are increasingly more business friendly all around. Net-lease deals do not have landlord responsibilities, so it doesn’t matter if the asset is close to you anymore.
What are the disadvantages?
Unfamiliarity with the market and, if needed, the vacancy risk of finding a new tenant in a market where you don’t know the right people to help you lease. For deals with maintenance requirements, buyers need to seek out property management and add that extra expense to their bottom line.
What else should our readers know about going outside of California for net-lease deals?
Most of these net-lease deals are coupon-clipper assets, and there are no landlord responsibilities — you just collect your rent and the tenant maintains the property. Being close to your properties isn’t important in owning this specific type of real estate investment. Stick to long-term and stable tenant names that will survive recessions and technology change, i.e., fast food and automotive. Going outside California can able you to pick up better returns and focus on growing markets in the country (Dallas, Seattle, Atlanta, Orlando, Nashville, etc.). If you do your homework, going east is not a difficult proposition.