In this triple net lease case research study, we check out a real-world circumstance including the advancement of a build-to-suit business residential or commercial property for a leading pharmacy chain in Colombia. By analyzing this scenario, you will gain hands-on experience analyzing a triple net lease (NNN) structure, a typical kind of lease in commercial property, where tenants are accountable for residential or commercial property costs. The job involves the acquisition of land in a tactical place and the building and construction of a residential or commercial property tailored to fulfill the occupant's operational requirements, supplying a strong example of a development-focused NNN offer.
Practice makes best! This is a real situation based on real residential or commercial properties and situations. Names and locations have actually been changed for privacy factors, however the principles are real-to-life.
Each case study shared in this series mirrors real life scenarios, either in terms of the types of offers you will take a look at in various functions or the kinds of modeling tests you'll be required to carry out as part of the interview procedure. You can browse 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, specializing in 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 household ties to Colombia, where you spent many summertimes going to family members and seeing firsthand the fast urbanization and development in cities like Bogotá and its surrounding locations.
Upon graduating from UCF, you operated in the banking sector in the U.S., getting important experience in financial analysis and financial investment methods. However, your enthusiasm genuine estate led you to sign up with a little genuine estate investment LLC, where you quickly advanced to a role that included managing financial modeling for various tasks. During this time, you took the A.CRE Real Estate Financial Modeling Accelerator course, becoming a professional in the field.
Now, leveraging your professional experience and deep understanding of both the U.S. and Colombian markets, you are ready to start your first real estate financial investment promotion in Colombia, in an area you know well from your family connections and routine gos to. This project includes establishing a build-to-suit industrial residential or commercial property for lease to a significant drugstore chain that is expanding quickly in Colombia and beyond.
Time to Make Your Mark
After years of sharping your abilities and constructing a reputation in genuine estate monetary modeling, you're all set to step into the spotlight as a property promoter. With a wealth of experience behind you and a deep connection to the Colombian market, you're figured out to find a financial investment that guarantees long-lasting, stable returns-one that can serve as the foundation of your brand-new endeavor.
As you begin your search, you reconnect with brokers who focus on retail property in Colombia. It's shortly before a former colleague reaches out with an interesting opportunity-a land advancement job in Chía, Cundinamarca, tailored for a significant pharmacy chain, BioMedica. The job in concern has a tactical location given that the roadways around the lot are being widened, which will create more vehicular traffic, and strong occupant appeal catch your attention right away. Sensing the potential, you choose to dive much deeper, conducting an extensive financial analysis to determine if this might be the flagship financial investment that sets your path to success.
The Opportunity
The job involves obtaining a prime piece of land in Chía, Cundinamarca, and constructing a build-to-suit commercial residential or commercial property particularly customized to the requirements of a leading pharmacy chain. The drugstore has a strong brand presence and is expanding strongly in the region, making this a highly attractive occupant.
This project is particularly engaging due to its customized design to meet the specific needs of the Drugstore, our renter demands consist of an area with parking area, close highways and drive through, to ensure optimal operational efficiency and consumer accessibility. However, the monetary characteristics of this financial investment require mindful consideration. For example, while the lease agreement uses a rate throughout the base term and renewal options to hedge against inflation (IPC).
To make an informed choice, it's vital to design the projected financial performance of this advancement and figure out if its long-lasting economics align with your brand-new company financial investment strategy.
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 (including land worth): $45/SF.
- Land worth: $18/SF.
- Year of construction: 2024.
- Lease term agreement: 15 years. Option: 5-year alternative renewal.
- Rental boosts: Colombian IPC (consumer Price index) Linked.
- Lease type: Triple Net Lease (NNN) - The property manager will supply an in-depth breakdown of these costs every year, and the tenant will reimburse the property owner for these costs 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 value of the building and construction, booking proportionally every month.
General Investment Assumptions
- 10-year analysis period. - All-cash purchase (i.e. no financing).
- All operating costs are paid by the renter.
- 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 costs 100 bps less that the market price.
Market Rent on lease arrangement: $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) project. This design is specifically created for single-tenant, net lease residential or commercial properties and includes features that allow you to finance development projects from acquisition through stabilization and disposition.
Answer the Following Questions for the BioMedica Project.
- Is the development cost per SF above or listed below replacement cost and by how much? - What is the typical totally free and clear return over the 10-yr hold duration?
- What is the IRR over the hold period?
- What is the unlevered equity several based on the projected money streams 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, consisting of lease escalation provisions, on the net present worth (NPV) of the investment. How does this impact the total IRR? - How does the area's forecasted growth and automobile traffic effect the financial investment's capacity for long-lasting success?
Extra Credit
- Partnership Model: Assume you generate a local investor to contribute 95% of the needed equity while your share it's the remaining 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 remaining cash circulations. Calculate the IRR and equity multiple for both you and the investor. - Sensitivity Analysis: Conduct a sensitivity analysis to demonstrate how changes in key presumptions, such as cap rates, rent escalations, and job rates, impact the general return metrics.
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Frequently Asked Questions about the BioMedica Chain Drugstore Build-to-Suit Investment Case Study
What type of lease is used in this case study?
This case study involves a Triple Net Lease (NNN) where the renter reimburses the property manager for residential or commercial property expenditures, including taxes, insurance coverage, and upkeep. The lease likewise includes IPC-linked rental boosts and a 5-year renewal alternative.
Where is the BioMedica project found?
The job lies in Chía, Cundinamarca, Colombia at Calle 2 # 12-24, a tactical area expected to gain from roadway expansion and increased automobile traffic.
What are the primary advancement and monetary assumptions?
Land cost: $620,000
Closing expenses: 4.5%
Development expense: $843,566
Approved lease rate: $14,355/ month
Lease term: 15 years with 5-year choice
Rental escalation: Linked to IPC
All-cash purchase