Re: Ray's insights on these 2 choices

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Posted by ray@lcorn on May 25, 2009 at 08:18:21:

In Reply to: Ray's insights on these 2 choices posted by Mike S on May 19, 2009 at 20:54:37:

Hi Mike,

My answer would depend on your current investment objective. For most of us $800T is a significant amount of money, but for some it may be a small portion of investable funds. Which it is for you is a factor in the decision, as is where you are in life, e.g. age, dependents, other income sources, etc.

The developer deal assumes a long time horizon, no management responsibilities, nominal investment return with an equity kicker that doubles as the risk premium. The downside is that your funds are committed for the long term, you have no control, and at risk of gov't funding snafus (which in an environment of trillion-dollar deficits cannot be discounted lightly). In my view this is a suitable investment for someone with a long time horizon (that is, age 50 or younger) and the amount represents no more than 20%-25% of investable assets.

The NNN deal offers 100% control, a decent return (though based on your comment of weak financials the cap is probably about 100 bps too low), and some measure of liquidity in that there is an active market for NNN single-tenant deals. The downside is that there is likely no upside other than any rent increases built into the lease, and the specialty nature of the building, and from your comment about the financials it probably isn't an investment grade tenant. That dictates the finance terms available, hence the amount of tax-free funds available for other investments.

Before saying "no", I'd want to know more about the "dirt-value" (e.g. location attributes, demographics, sales price PSF vs. replacement cost, etc.), length of time remaining on the lease and renewal options. It could be that the residual value offsets the tenant risk.

The main attraction of a true NNN credit tenant lease (CTL) deal is the dual exit strategy for the capital. With 1031 equity funds it is common practice to do a cash-out refi subsequent to acquisition. The better the tenant credit, the better the finance terms available, and the more funds that can be accessed tax free. Assuming adequate tenant quality and reasonable dirt-value factors they can be suitable for almost any investor.

ray

p.s. for more on the "dirt-value" factors mentioned above, see the article "The Risks & Benefits of Triple-Net (NNN) Properties" at http://www.creonline.com/articles/art-286.html

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