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In this triple net lease case study, we check out a real-world scenario including the development of a build-to-suit industrial residential or commercial property for a leading pharmacy chain in Colombia. By analyzing this situation, you will gain hands-on experience analyzing a triple net lease (NNN) structure, a common type of lease in business realty, where occupants 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 customized to meet the tenant's functional needs, offering a strong example of a development-focused NNN offer.
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Practice makes ideal! This is a real scenario based upon real residential or commercial properties and scenarios. Names and locations have been changed for privacy factors, but the principles are real-to-life.

Each case study shared in this series mirrors real life scenarios, either in terms of the types of deals you will take a look at in different roles 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 research 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, concentrating on Real Estate. While studying in Florida, you developed an eager interest in global real estate markets, particularly in Latin America. This interest was fueled by your family ties to Colombia, where you spent lots of summertimes visiting family members and experiencing firsthand the quick urbanization and development in cities like Bogotá and its surrounding locations.

Upon finishing from UCF, you operated in the banking sector in the U.S., gaining valuable experience in financial analysis and investment strategies. However, your passion genuine estate led you to sign up with a little property financial investment LLC, where you rapidly advanced to a role that included supervising financial modeling for different jobs. 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 property financial investment promotion in Colombia, in a region you know well from your household connections and regular visits. This job includes developing a residential or commercial property for lease to a significant drugstore chain that is broadening rapidly in Colombia and beyond.

Time to Make Your Mark

After years of sharping your abilities and building a credibility in genuine estate monetary modeling, you're ready 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 determined to discover an investment that promises long-lasting, stable returns-one that can act as the cornerstone of your brand-new endeavor.

As you start your search, you reconnect with brokers who focus on retail property in Colombia. It's shortly before a former coworker connects with an appealing opportunity-a land development task in Chía, Cundinamarca, tailored for a major pharmacy chain, BioMedica. The job in question has a strategic area because the roads around the lot are being expanded, which will produce more car traffic, and strong renter appeal catch your attention right away. Sensing the capacity, you decide to dive deeper, carrying out a comprehensive monetary analysis to figure out if this could be the flagship investment that sets your path to success.

The Opportunity

The project involves obtaining a prime piece of land in Chía, Cundinamarca, and constructing a build-to-suit commercial residential or commercial property particularly tailored to the requirements of a leading pharmacy chain. The pharmacy has a strong brand presence and is broadening strongly in the region, making this an extremely appealing tenant.

This job is especially compelling due to its tailored style to fulfill the particular requirements of the Drugstore, our occupant demands include an area with parking space, close roads and drive through, to guarantee optimal operational effectiveness and customer availability. However, the financial dynamics of this investment need mindful factor to consider. For example, while the lease arrangement provides a rental increase rate throughout the base term and renewal choices to hedge against inflation (IPC).

To make a notified choice, it's important to model the forecasted monetary performance of this development and figure out if its long-term economics align with your new firm 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
• Land Area: 34,444 SF - Constructed Area: 6,300 SF Replacement Cost (including land value): $45/SF.
• Land value: $18/SF.
• Year of construction: 2024.
• Lease term arrangement: 15 years. Option: 5-year alternative renewal.
• Rental increases: Colombian IPC (customer Price index) Linked.
• Lease type: Triple Net Lease (NNN) - The proprietor will provide a detailed breakdown of these expenses yearly, and the occupant will compensate the property owner for these expenses 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 construction, reserving proportionally each month.
  
  General Investment Assumptions
  
  - 10-year analysis period.
• All-cash purchase (i.e. no funding).
• All running expenditures 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 expenses 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) task. This model is specifically created for single-tenant, net lease residential or commercial properties and includes features that allow you to underwrite advancement projects from acquisition through stabilization and personality.
  
  Answer the Following Questions for the BioMedica Project.
  
  - Is the development expense per SF above or below replacement expense and by just how much?
• What is the average totally free and clear return over the 10-yr hold period?
• What is the IRR over the hold duration?
• What is the unlevered equity several based on the projected cash streams over the 10-year hold duration, and how does this metric align with your financial investment criteria?
  
  Conceptual Questions
  
  - Evaluate the impact of the lease structure, consisting of rent escalation clauses, on the net present worth (NPV) of the financial investment. How does this impact the total IRR?
• How does the place's projected growth and lorry traffic effect the investment's capacity for long-lasting success?
  
  Extra Credit
  
  - Partnership Model: Assume you generate a local financier 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 capital. Calculate the IRR and equity multiple for both you and the financier.
• Sensitivity Analysis: Conduct a sensitivity analysis to demonstrate how changes in key assumptions, such as cap rates, lease escalations, and vacancy rates, effect the overall return metrics.
  
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  Frequently Asked Questions about the BioMedica Chain Drugstore Build-to-Suit Investment Case Study
  
  What kind of lease is utilized in this case study?
  
  This case research study involves a Triple Net Lease (NNN) where the tenant repays the landlord for residential or commercial property costs, consisting of taxes, insurance coverage, and maintenance. The lease also includes IPC-linked rental boosts and a 5-year renewal option.
  
  Where is the BioMedica task located?
  
  The task is located in Chía, Cundinamarca, Colombia at Calle 2 # 12-24, a strategic area anticipated to take advantage of roadway growth and increased vehicular traffic.
  
  What are the main development and financial presumptions?
  
  Land expense: $620,000
  
  Closing costs: 4.5%
  
  Development cost: $843,566
  
  Approved lease rate: $14,355/ month
  
  Lease term: 15 years with 5-year alternative
  
  Rental escalation: Linked to IPC
  
  All-cash purchase; no financing used
  
  What design should be used to finance this case?
  
  The case needs to be financed using the A.CRE STNL Valuation Model, specifically developed for single-tenant net lease development and financial investment scenarios.
  
  What types of return metrics should be determined?
  
  You are asked to compute the:
  
  Development expense per SF vs. replacement cost
  
  Average free and clear return
  
  Unlevered IRR
  
  Equity multiple over a 10-year hold duration
  
  How does the lease structure impact the NPV and IRR?
  
  The triple net lease with IPC-linked increases makes sure predictable and growing cash flows, boosting both NPV and IRR by hedging inflation and lessening property manager expense threat.
  
  Why is area an essential factor to consider in this case?
  
  The residential or commercial property's location in Chía, a growing location with prepared facilities improvements, enhances its long-term potential, occupant retention, and attract future purchasers.
  
  What assumptions are needed for the extra credit collaboration design?
  
  Assume:
  
  Investor contributes 95%, you contribute 5%
  
  Investor receives a 9% preferred return
  
  Remaining money streams split pari-passu You'll then calculate IRRs and equity multiples for both celebrations based upon the waterfall structure.
  
  What does the sensitivity analysis aim to explore?
  
  The level of sensitivity analysis tests how changes in cap rates, rent escalation, and job rates impact return metrics like IRR and equity multiple, helping evaluate investment risk.
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  Acerca del Autor: Emilio es un Analista Financiero del equipo de A.CRE. Tiene una formación diversa, con experiencia en economía de importación y exportación, blockchain, marketing, programación y comercio. Ha construido su carrera involucrándose en proyectos que le apasionan, lo que le ha llevado a interesarse por el sector inmobiliario comercial y por A.CRE. En su tiempo libre, le encanta cocinar y aprender más sobre tecnología. Para contactar a Emilio por correo haz click aqui.