Wednesday, April 27, 2011

How to Calculate the Value of a Zero Property

How do I calculate the possible market value of a zero cash flow property?

Values for zero cash flow properties are usually expressed as a percentage over the debt. That is to say, some percentage in excess of the debt. As an example, a brand new CVS zero with 25 years left on the lease/loan that fully amortizes would price in today's market at probably between 9% and 10% over the debt, such that if the loan balance were say $10Mil, then the total value be about $11Mil, meaning you could buy it with approx. $1Mil in equity. Further, the more seasoned that zeros become (older) the more valuable they tend to get, as you are closer to the day that you own it free and clear.

Another way to approach the problem would be to value the store as you would any other NNN property by applying a cap rate to the NOI. However, by applying a cap rate to the NOI, you would probably need to add at least 150 basis points premium to the cap rate. This helps account for the constraints of the zero deal (i.e. inability to refinance etc.). Said differently, If you have a deal that would otherwise trade at a 7.00%, as a zero it would probably value closer to an 8.5%.

It should be noted that both of these methods determine “gross” values and not a “net” value. That is to say that the net value (Gross Value minus the Debt) is the actual out of pocket cost to you to do the deal.

Lastly, as should be obvious, the real estate itself should play a role in it's valuation in that, location, possible reuse, and building condition may drive whether or not their is any residual value to the building at all in the absence of the tenant exercising their renewal options. A critical mistake that many people make when looking at zeros is to discount the real estate and simply view them as a security or abstract financial instrument. This is not the case, real estate fundamentals still apply.

Wednesday, April 20, 2011

Net Lease Conference 2011 – What a Difference a Few Years Makes

The 2011 net lease conference displayed the most positive atmosphere since the economic pitfall. It was easily the best attended net lease conference in years. We are continually told that things are getting better, but to see that attitude on the ground is a different story.

The most noticeable thing besides its attendance was the high level of interest participants showcased. In previous years, a sizeable number walked around in almost a trance –trying to figure out how to be active in a non-active market. 2011 saw the return of the players. This energy revitalized the event and gave it a positive attitude. People were optimistic about the future.

That said a few prominent issues kept appearing:

  • Interest rate fears.
  • Overall lack of supply continues to plague the market.
  • Development probably won’t begin again till 2012 (and that's pending interest rates)
  • Sale Leasebacks are currently popular ways to raise capital (more so than usual anyway).

Overall, the 2011 net lease conference showed lots of promise for the future.

Wednesday, April 13, 2011

Net Lease Profile: Walmart

Wal-Mart discount department stores vary in size from 51,000 square feet to 224,000 square feet, with an average store covering about 102,000 square feet. Wal-Mart Supercenters stock everything a Wal-Mart discount store does, and includes a full-service supermarket. Wal-Mart Supercenters vary in size from 98,000 to 261,000 square feet, with an average of about 197,000 square feet. Wal-Mart has displayed exceptional growth over the past decade and its AA S&P investment grade credit rating carries strong appeal for real estate investors.

Wal-Mart stores are rare investments on the net lease market with the transaction size, acreage and square footage of the investment (much larger on all counts than the typical netlease property) appealing to a more select group of investors. Big annual rents and relatively low selling cap rates means the typical net lease Wal-Mart transaction is over $10mm. The selling cap rate is often in the low 6's to high 7's depending on lease structure and remaining term.


  • Corporate guaranteed, investment credit.
  • High visibility virtually creating a new downtown wherever it opens.
  • Typically low rent per square foot.
  • Low recourse and low interest rates often available.


  • Flat rental rate, minimal escalations
  • Large footprint poses re-lease problems should the tenant relocate.

Wednesday, April 6, 2011

Bright Lights for Retail's Future?

Closure announcements for this quarter GAFO (general merchandise, apparel, furniture and other goods) fell by 53% compared to last year. Blockbuster and Talbots made up 41% of those closings. This suggests retailers are rebounding from their severe contraction.

According to ISCS, a total of 700 U.S. stores and restaurants – 10.4 million square feet and .07% of retail space – closed this quarter. A 53% decreased from the year before. This has been connected to a 3.3% increase in shopping center sales last year. 2010 did witness a 7.5% increase in GAFO closures over 2009. However, the latter half of 2010 experienced significant improvement. This improvement has trended into 2011.

High quality net lease properties in select markets have already experiences noticeable cap rate compression. Whether or not this trend spreads throughout the greater retail market is uncertain.

Note: Credit ratings have taken on increasing importance in our shaky economic landscape. S&P provides an insightful guide betweencorporate credit rating and default rate: