All Forum Posts by: Wells Mangrum

The 8% cap rate is strong. Why are they asking such a high cap rate when much of the NNN market is in the 6-7% range? Makes me wonder if there is some more risk in the deal than is immediately apparent. Having said that, I recently closed on a NNN lease at a 8.5% cap and I'm very happy so far with the results. But I know that my investment is a higher risk than a Starbucks or cvs. The 1% annual rent escalations are mediocre and would also be a cause of concern for me. Is this a 5 year fixed loan that amortized over 25 years? If so, then this is something that I would change. First, I would think that you could get the loan at 4%. Maybe you could offer to amortize it over 20 years in return. Second, I don't like financing a 20 year fixed rate lease with a 5 year fixed rate loan. If interest rates rise significantly then you are exposed to interest rate risks. This is a risk that is over and above the tenant default risk. I do not know the solution to this problem but the following is my current opinion which I warn you is not mainstream: My current idea is to work through a large bank to obtain a swap interest rate hedge. I alluded to this in an earlier post on this site. This transaction allows the investor to get a long term fixed rate loan. I spoke with a large bank and this appears to be a viable option. I'm not sure why others don't pursue it. This option wouldn't eliminate the problem of receiving low rents in 20 years due to inflation. But at least it would help you to keep cash flowing if interest rates rise.

How are Assisted Living Centers currently performing? Is government funded reimbursement (such as Medicaid) falling and, if so, is this having a strong effect on profitability? I may pay for an industry report from firstresearch.com. But first I'd be interested in your aggregated knowledge. Thanks.

Thanks Joel, I believe you are describing a scenario where the investor does due diligence to show that he/she can still cash flow if interest rates go up. This is important to do but it is not a hedge. In a hedge, cash flow would be approximately the same no matter what interest rates do. For example, say I bought a $2 million starbucks with 20 year lease at 6% cap with 20% down and a 5 year fixed rate loan. At year 6 when I refinance it is currently unknown what interest rates will be so the future return is unclear and thus risky. Instead of taking on that risk, let us say that the investor instead enters into the interest rate swap market and sells a 20 year fixed/floating swap wherein the investor pays the fixed rate and receives the floating rate. In this alternate scenario the investor's future cash return at 6 years is known up front no matter what happens to interest rates because the swap hedges against the risk of changing floating interest rates. Do any of you have experience with performing such a hedge? How did you enter the swap market? I assume you used a large financial institution as an intermediary. Thank you for your time.

For those that invest in commercial real estate with NNN tenants and long leases, what strategies do you use to hedge against interest rate risk?

I believe that the most simple hedge is to obtain a loan that has the same term as the lease.  For example, if the lease is 20 years, it is nice to get a fixed rate loan for 20 years.  This matches the assets and liabilities.  But commercial banks are loathe to write a fixed loan for 20 years, especially in my price range (1-2 million dollars).  

I have heard that life insurance companies give longer term loans.  

Has anyone tried entering into the interest rate swap market as a hedging tool?  It seems like this would be the perfect tool with the one exception that the market is designed for big institutions and not single investors.  I'm particularly interested in interest rate swap futures as these essentially eliminate counter-party risk.  But again, these are not immediately available to individual investors.