All Forum Posts by: Kevin Sellers

Many of my clients are selling their CA residential rental properties at low cap rates and then using the 1031 exchange process to replace with single tenant properties in Midwest and Southeast.  There is a huge inventory of single tenant properties with strong tenants and long term lease contracts.  You can defer the capital gains tax and enjoy passive and reliable cash flows.

For most of the lease contracts I see, at least the first option has a fixed rent increase. When there are multiple options, sometimes the first one or two option periods have fixed rent increases and maybe the final option is at FMV. When the initial lease term is only three years, it would be unusual to have FMV calculation for the first option period. I'm assuming the initial lease term has no annual rent increases. Most of the leases that have annual rent increases are in the range of 1.25% to 2.00% per year. Another common structure is 7.50% to 10.0% every five years. So if you can negotiate a 10% increase for the first option after only three years of initial lease term, that is strong! But if you like the tenant and the initial lease rate, I would not push it too hard, given the difficulty in leasing the property thus far.

Ravi - if you are considering leveraging your acquisition, keep in mind that lenders are wary of financing investment properties leased to "mom & pop" or local tenants, even though the tenant may be profitable.  Lenders prefer businesses that operate 10+ locations and 25+ is better.  Properties leased on long-term lease contracts to public companies with investment grade bond ratings receive the best loan terms (Walgreens, CVS, O'Reilly Auto, Advance Auto, AutoZone, Dollar General, Fresenius).  However, excellent financing is also available for public companies with just below investment grade (DaVita, Taco Bell, KFC) and strong franchisees of national brands.

Many of my clients are selling multifamily properties and transitioning through 1031 exchange to STNL properties and leveraging their exchange funds. Some are selling CA properties at very low cap rates, then replacing with STNL or 2-4 tenant NNN retail properties in Midwest or Southeast markets at much higher cap rates. Depending on the tenant and remaining lease term, we are borrowing at 10-year fixed interest rates that 175-225 basis points below the going in cap rate on the replacement property. The client achieves improved cash flow and rids themselves of the management headaches!

Henry Street Capital, LLC is a commercial mortgage brokerage company organized to serve individual investors in the United States and Canada who own commercial real estate properties in the U.S. HSC arranges financing to acquire or refinance properties anywhere in the United States with emphasis on:

* Single tenant retail, medical and restaurant properties nationwide.
* Multi-tenant retail, medical office and office properties nationwide.

Capital sources include commercial banks, credit unions, non-bank bridge lenders, life insurance companies and CMBS lenders.Capital sources include commercial banks, credit unions, non-bank bridge lenders, life insurance companies and CMBS lenders. Loan amounts from $300,000 to $10,000,000.

See more at www.henrystreetcapital.com

Eric - If you put this or similar multifamily property in escrow, an excellent financing option may be the Freddie Mac Small Balance Loan Program.  The program offers nonrecourse financing with 10-year fixed rate and 30-year amortization.