Retail Store Closings Up

In our course we specifically point out factors you need to take into consideration when buying a triple-net-lease investment. Personally, we have not ever invested in a retail clothing outlet strip center because of the vulnerability in economic cycles.

For the educated triple net lease investors, economic downturns can even be good things. For instance, one strategy we lay-out is having counter-cyclical tenants. That is tenants who prosper during bad economic times, like Auto Zone. More people fix their car instead of using a mechanic or buying a new one in bad economic times. This is why you need to be an educated triple net lease investor.

NREI had this to say regarding the recent retail store closings:

Apparel stores accounted for about 35% of the 2,831 store closings tracked by the International Council of Shopping Centers (ICSC) in the first half of 2008. The retailers that added to this tally include Wilson’s Leather, Goody’s Family Clothing, Ann Taylor, and Geoffrey Beane-outlet stores.

Retailers focusing on home entertainment, home furniture and furnishings, and food and beverage have also been at the forefront of the store closings during the first half of 2008.

About 6.5% of the store closings through the first half of 2008 tracked by the retail industry trade group were in the home furniture and furnishings niche, one that moves in tandem with the housing market. However, this is an improvement considering that this niche accounted for more than 14% of store closings in the first half of 2007, and about 34% of the closings in the second half of 2007, according to ICSC.

“The stores that are more susceptible to slowdowns in the economy are the stores announcing closings,” notes Abigail Marks, an economist with CBRE Torto Wheaton Research in Boston. “Consumers have less discretionary income right now, so non-essential goods such as clothing are struggling with sales. Thus, some clothing retailers have to close stores.”

PPR’s Mulvee anticipates that, following a soft 2008 Christmas season, the first quarter of 2009 will likely be another big quarter for store closings with as many as 3,400 closings projected.

Inflation and Rent Bumps

The only people who think inflation is not a problem is the government. I think the government says inflation is something like 4%. Unfortunately if you really live life on the edge like I do and eat, drink, pay your electric bill, and fill up your wife's car - you know really discretionary things like that, you know inflation feels like it's about 40%. Without getting into financial jargon, $1 today is worth a lot less than $1 last year.

This brings me to my point on having rent bumps (or scheduled increases) in your rental property. You should be highly worried about inflation if you are in any type of investing other than triple net lease properties due to property management expenses. However, if you own a NNN property the tenant is paying everything, so you don't have to worry. However, you still need to make provisions for rent increases due to your personal cost of living going up or your company's overall expenses going up. Rumor has it, secretary's like raises every now and then.

Here is what the CREI say's about inflation:

The Inflation Trap. At one time, single-tenant leases were structured with flat income for 25 or 30 years, and then had a series of options at drastically reduced rent, such as 2 percent of the property’s value. The theory was that the loan would be paid off by then, so the landlord’s spendable income would not be reduced. But inflation made this a nightmare for owners. When income was compared to current rent schedules, properties only could be sold at tremendous price reductions.

Commerical Property Lending for Triple Net Leases

Clearly the residential real estate market is in a recession. Now, some of the commercial real estate market is entering a recession. I'm not claravoiant so I don't know what the future will look like, but I am fairly certain people will continue to work on their car, get the prescriptions filled at pharmacies, and occasionally eat out.

I have just listed the characteristics of major tenants for triple net leases. It should also be pointed out that although several retail property companies are having more vacancy than last year, several are continuing to expand.

Jamie Woodwell, the senior director of commercial/multifamily research at the Mortgage Bankers Association said, “The global credit crunch meant a net decline in the balance of mortgages held in commercial mortgage-backed securities, collateralized debt obligations and other asset-backed securities, but banks, thrifts, life insurance companies, Fannie Mae, Freddie Mac and nearly every other investor group increased their holdings of commercial and multifamily mortgages during the quarter.”

The bottom line is this: DO NOT WAIT on the perfect environment to invest. If you do - YOU WILL NEVER INVEST, AND YOU WILL GET LEFT BEHIND.

Triple Net Lease Properties continue to sell

I found this on NREI’s web-site. It just goes to show you that triple net lease properties are continuing to sell.

Glazier Foods Co. has sold its 286,000 sq. ft. headquarters and distribution center in Houston to an investment group that plans a $14 million expansion to the property. As part of the deal, the food service distributor has leased the entire space back from the new owner. The purchase price was undisclosed.

Construction has already begun to add 160,000 sq. ft. to the distribution center over the next year, which will bring the property’s overall size to 446,000 sq. ft. and increase the size of Glazier Food’s freezer and dry storage areas. GE Capital provided financing for the acquisition and funding for the $14 million expansion.

Triple Net Lease

Source Wikipedia:

requires the tenant to pay, in addition to the fixed rent, some or all of the property expenses which normally would be paid by the property owner (known as the “landlord” or “lessor”). These include expenses such as real estate taxes, insurance, maintenance, repairs, utilities and other items.^[1]

The precise items that are to be paid by the tenant are usually specified in a written lease. For properties that are leased by more than one tenant, such as a shopping center, the expenses that are “passed through” to the tenants are usually prorated among the tenants based on the size (square footage) of the area occupied by each tenant. The term “Net Lease” is distinguished from the term “Gross Lease”. In a net lease, the property owner receives the rent “net” after the expenses that are to be passed through to tenants are paid. In a gross lease, the tenant pays a gross amount of rent, which the landlord can use to pay expenses or in any other way as the landlord sees fit.

3 Net Lease Profits