Net Lease Investments

NET LEASE ADVISORSecond Quarter 2010

YOUR SOURCE FOR INVESTMENT REAL ESTATE™

The Rise ofNNN URBAN PROPERTIES

Emerging Trends in Real Estate

TENANT SPOTLIGHT:

COMPANIES, INC.

Bound

CALKAIN COMPANIES, INC. N E T L E A S E A D V I S O R Second Quarter 2010

“In the middle of every dif-ficulty lies opportunity”

- Albert Einstein

Visitors to the Calkain website (www.Calkain.com) may have no-ticed considerable documenting

over the past 12 months of the sale of Triple Net (NNN) urban properties. De-mand for credit rated property in the ur-ban core of primary markets has always been strong. We now see inclusion of lo-cal, non-credit tenants involving smaller transaction sizes drawn into the mix of investment properties sought by inves-tors. Investors have shown a willingness to pay aggressive caps for urban proper-ties. An increase in mixed use residential condominiums brought about by popu-lation movement toward the urban core and a pause in expansion by national re-tailers has contributed to the wide-rang-ing demand for NNN urban properties. Coming on the heels of the recession and the ensuing across-the-board hike in cap rates, this move to dense, high traffic urban locations signals where in-vestors want to be over the next decade.

Recently identified as a top niche invest-ment trend by the Urban Land Institute (ULI), mixed-use urban projects have drawn retailers and investors to this

asset type even in the current market cycle. Driven by a desire to spend less time in traffic, live in a smaller footprint and work and play within an urban at-mosphere, aging boomers and Gen XYZ-ers alike are leaving the edge and making their way back to the city. Developers have capitalized on this trend by coupling high-rise condominium living with easily accessible ground floor retail space. The convenience of these on-hand amenities makes for an attractive lifestyle for lo-cal residents and nearby office work-ers. While not a new phenomena, the rise in urban mixed-use development meets the market at a very good time.

Unable to find quality assets in a tight market and unable to secure favorable debt for less well known tenants in secondary and tertiary markets, inves-tors are finding that lenders are putting more emphasis on the intrinsic value of the real estate. Urban properties are typically more easily adaptable to alter-native uses and are viewed favorably by lenders. Investors seeking passive real estate investments are turning to ur-ban, income-producing condominiums (the new “infill”) of varying types as a suitable component of their investment portfolios. In a recent Real Capital An-alytics (REA) report it was quoted that

there were over $20 billion in retail con-dominium sales over the past five years. That figure only represents transactions of $5 million or greater in size. As the chart below indicates, our own experi-ence proves that there were a significant number of transactions well below REA’s $5 million baseline. Included in the mix of under $5 million condominiums is a broad array of tenants ranging from companies with Standard and Poors AA+ credit ratings to start up restau-rant concepts with personal guarantees. That broad range of tenants is good news for developers and investors alike. To focus on a single market, the Wash-ington, D.C., area seems to be thriv-ing well amidst the downturn. The Wall Street Journal recently reported:

“The nation’s capital has drawn interest from inves-tors seeking to place a defen-sive bet in the still-turbulent property market. The idea is that companies working with the federal government have a more stable business ….”

WSJ 3-17-10

For investors, an income producing NNN property, whether a condominium,

By: Rick Fernandez

The Rise of

NNN URBAN PROPERTIES


zero lot line structure or a combina-tion of the two, can cover all three of the “L’s” of real estate and quite of-ten at a price point unavailable to the average investor hoping to acquire “downtown” investment property. The pause in expansion by national retail-ers and the lack of quality NNN invest-ment real estate has prompted investors to give urban real estate a hard look. As reported by Calkain in a previous article, “While retail condos may not look like a typical net leased asset, their design and operation are almost identical to the normal, free standing, single tenant buildings so popular in today’s investment market.” However, an income-producing condominium may not be right for everyone. Con-dominium ownership comes with its own unique challenges including parti-tioning of common element expenses, condominium board representation, condominium fees and condominium association policies and restrictions. In spite of this, like other NNN investment properties, the tenant is responsible for all of those expenses. Investors must weigh whether the potential challeng-es of urban condominiums are signifi-cantly different from the CAM charges, easements, and restrictions associated with typical NNN investment proper-ties. Risk is inherent in any investment but the solid urban location fueled by strong, daily, pedestrian traffic may be equal to a pad site situated as an out-parcel in a performing suburban center.

Washington, D.C., scores the highest marks during a re-cession. While hard-pressed

lenders pull back in most cit-ies, major insurers and big banks have taken a long term view and are actually provid-ing financing for new deals.

ULI - Emerging Trends in Real Estate 2010

For developers, the rise of urban retail condominiums and mixed-use office projects and the willingness of tradi-tional NNN investors to pursue these as-sets offers an opportunity to monetize portions of the assets as well as unhook from the completed portion of the proj-ect. Developers using this streamlined method of disposition have used their newly found proceeds to either pay down existing debt or fund new projects.

Additionally, a properly structured ur-ban property provides flexibility in how a developer can subdivide the spaces often providing an infusion of cash from the sale of the retail units long before the residential properties have sold out. The typical condominium resident boasting high discretionary income and a steady appetite for con-sumer goods is a highly sought after demographic for retailers. From a NNN investment perspective, the NNN retail condominium units, like a typical strip center, benefit from a strong anchor or even shadow anchored presence. A unique aspect of urban properties is that the anchor can be a dense concen-tration of office space or even a Metro station because the flow of subways, buses, cars, taxis and pedestrians is the engine that drives the street scene.

Investors are returning to the market and the time is right for urban investments. In today’s market, suitable NNN invest-ment property is hard to find. Quality NNN investment property is harder still. Perhaps the hardest of all, are the $1 mil-lion to $5 million size transactions where the average investor and 1031 Exchange buyers focus their attention. Urban in-vestments fit this niche and NNN inves-tors have demonstrated a willingness to step up and pay in excess of $1,000 a square foot to acquire these assets.

Calkain Urban Investment Advisors (CUIA), a division of Calkain Companies, specializes in premier investment prop-erties in high density, urban districts throughout the United States. CUIA builds on Calkain’s record of success in brokering some of the most notable transactions within the urban net lease market and focuses strictly on assets located within metropolitan regions. Calkain’s newest and proven division un-derstands the ever-growing net leased, urban investment market and the re-quirements of investors and develop-ers working within the space. Our ad-visors guide clients through the many aspects which affect their prospective properties, ensuring only the best in-vestment decisions are pursued.n

FOR MORE INFORMATION:Rick Fernandez | Managing Director

Calkain Companies, Inc [email protected]

Phone: 703.787.4714

Location Sale Date SF Rent/SF $/SF NOI Sales Price Cap Rate

PNC Bank 1401 P St., NW September 2006 4,110 $65 $1,119 $267,000 $4,600,000 5.80%

Wachovia Bank 1150 K St., NW July 2007 3,424 $62 $1,119 $210,650 $3,830,000 5.50%

Fedex/Kinkos 1327 14th St., NW November 2007 2,285 $60 $810 $137,100 $1,850,000 7.41%

Garden District 1520 14th St., NW April 2008 2,775 $50 $673 $138,750 $1,866,424 7.43%

Lululemon 1515 15th St., NW December 2008 2,306 $60 $791 $138,360 $1,825,000 7.58%

Pitango Gelato 1515 15th St., NW September 2009 550 $80 $1,124 $44,000 $618,000 7.12%

Mitchell- Gold 1526 14th St., NW October 2009 7,338 $35 $368 $256,830 $2,700,000 9.50%

TD Bank 1515 15th St., NW March 2010 4,403 $69 $979 $301,606 $4,300,000 7.00%

The Matrix 1529 14th St., NW Pending 8,862 $38 $518 $332,950 $4,592,413 7.25%

Sweetgreen 1515 P St., NW Pending 1,133 $77 $1,089 $87,375 $1,234,110 7.08%

R E C E N T N N N p R O p E R T Y S A L E S I N W A S h I N g T O N , D . C .


Washington, D.C. | arlington, va

URBAN RETAIL INVESTMENTt h e p l a C e t o t u r n f o r u r b a n r e t a i l

m O R E I N f O R m A T I O N

1749 - 1753 Columbia roaD, nW | Washington, D.C.

NOI $868,848

C V S / p h a r m a c y

pRICE $4,230,769 | CAp Rate 6.50%georgia ave nW & neW hampshire ave, nW | Washington, D.C.

C V S / p h a r m a c y

3130 lee highWay | arlington, va

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pRICE $7,692,308 | CAp Rate 6.50%

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In addition to attending and host-ing several industry events in recent months, Calkain has begun prepar-

ing for the International Council of Shopping Centers’ (ICSC) annual RECON conference in May. Real estate veter-ans and professionals attending the Las Vegas ICSC have scheduled meetings

To meet with a Calkain team member while in Las Vegas

Call 703.787.4714 or e-mail [email protected]

2010 ICSCMid-Atlantic

Idea Exchange

with developers, REITs, investors and as-set owners seeking to learn more about trends and overall market dynamics, especially given the uptick in net lease investment transactions over the last six months.

When discussing income-producing real estate and developments in the market, Calkain is considered to be a premier industry leader and resource with an abundance of information on such top-ics. Thus far in 2010, Calkain was pres-ent and featured at ICSC events in Wash-ington, D.C., Virginia and Florida and has been tapped for 2011’s planning boards for subsequent ICSC conferences.

Calkain’s principals extend and invi-tation and encourage all interested ICSC-Las Vegas attendees to schedule appointments to meet with them in ad-vance. Meetings can be scheduled from Sunday, May 23rd through Tuesday, May 25th by contacting Cheri Martian at [email protected]. n

2010 ICSCFlorida

Idea Exchange

Calkain is

Bound


Calkain Companies recently pro-moted Rick Fernandez to Man-aging Director of the new Urban

Investment Advisors (CUIA) divison. Gerlad E. Burg was also welcomed to the team as Managing Director of Calkain Reality Advisors.

The new division, Calkain Urban In-vestment Advisors (CUIA), was formed to capitalize on and grow the business already procured in urban retail by Calkain’s professionals. The new division will focus solely on the growing dynamic

of Urban Net Lease Investments.

With the new di-vision comes the promotion of Rick Fernandez, the Managing Director of CUIA. Rick was previously Assistant Vice President of Calkain Realty Ad-visors, the private market division of

Calkain Companies. Rick has a solid background in the urban investment community where he has transformed developments into investment opportu-nities for both developers/owners and investors.

Jonathan Hipp, Chief Executive Officer and President stated, “Rick has always been a big part of our expansion plans and we are very fortunate to have him grow this part of our company. His suc-cess is a testament to his professional-ism within the net lease industry as a whole and specifically within the urban

environment. Calkain is a proven leader in the market and Rick’s confirmed expe-rience only solidifies our role within the net lease community.”

Calkain also recent-ly welcomed Jerry Burg to the team. Jerry will be the Managing Director of Calkain Realty Advisors in the Res-ton, Virginia office.

Before joining Calkain in January 2010, Jerry was Managing Director & SVP at Northmarq

Investment Services where he focused on investment sales in the Washington, D.C. marketplace. Prior to Northmarq he was a SVP at Marcus & Millichap and a member of the KBC Group which closed over $235 million in investment sales. He is a founding member of the Nation-al Practice for Medical Office Building Sales and became a licensed real estate agent at Carey Winston/Transwestern. n

I nfill vs. Suburbs. Road congestion, higher energy costs, and climate change concerns combine to alter

people’s thinking about where they decide to live and work. “It’s a funda-mental shift.” The lifestyle cost-of-living equation starts to swing away more dra-matically from bigger houses on bigger lots at the suburban edge to greater convenience and efficiencies gained from infill housing closer to work. These homes may be more expensive on a price-per-pound basis, but reduced

driving costs and lower heating/cooling bills provide offsets. Time saved avoid-ing traffic hassles moderates stress and enhances productivity. “Two-hour com-mutes reach tipping point with higher energy costs” and “near-in suburbs will do well especially if they link to business cores by mass transportation.” Empty nesters and later-marrying echo boom-ers continue to flock to cities and urban-izing suburban areas. For aging baby boomers, infill apartment or townhouse living means less upkeep and closer

proximity to cultural and entertainment attractions. The young singles crowd stays closer to the action, yet they don’t need to worry about finding the right suburban school district for children. As 30-something couples have kids and consider schools, “more will orient to infill locations and less edge-increasing numbers of suburban school systems will lose advantages as tax bases falter.” n

Source:

Emerging Trends in Real Estate

Calkain Companies keeps growing

Rick Fernandez Managing Director, Calkain Urban Invest-ment Advisors

Gerald E. Burg Managing Director, Calkain Realty Advi-sors


Walgreen Company (NYSE: WAG) is the nation’s largest drug-store retailer in terms of sales,

even though it has fewer store locations than its closest competitor CVS. Wal-greens and its competitor drugstores are engaged in the retail sale of pre-scription and non-prescription drugs and front-store products such as beauty care, personal care, household items, candy, photofinishing, greeting cards, convenience foods and seasonal items, as well as liquor and tobacco where per-missible by law. As of March 31, 2010, Walgreens operated 7,720 locations in 50 states, the District of Columbia, Guam and Puerto Rico. It plans to grow its store base by approximately 4.5-5% in fiscal 2010.

Prescription sales constitute a large portion of Walgreens business, which accounted for 65% of sales during fis-cal 2009. Third-party sales, where re-imbursement is received from managed care organizations, government and pri-vate insurance, were 95.3% of prescrip-tion sales in fiscal 2009. Overall, Wal-greens filled approximately 651 million prescriptions in fiscal 2009.

The poster-child of net lease properties, Walgreens has been a highly traded in-vestment property given the low risks typically associated with these drug-store properties. Walgreens properties boast a strong tenant rating as indicated by its investment grade A2 and A+ credit ratings from Moody’s and S&P, respec-tively. Additionally, the drugstore sector remains stable given is nondiscretion-ary merchandise offerings. Walgreens showed a 6.8% sales increase during Au-gust pushing their total sales for fiscal year 2009 up 7.3% to $63.35 billion.

Walgreens is the stereotypical net lease investment as they exemplify quality in all three key characteristics: Credit, Real Estate, and Lease Terms. As the leader in the retail drug store, they boast the highest corporate credit rating by both Standard and Poor’s and Moody’s. One key benefit to their strong rating is that even in this debt starved market, Wal-green’s credit rating qualifies their net

leased locations for Credit Tenant Lease (CTL) financing, which can run as high as 97% loan-to-value creating a larger qualified buy-ers pool.

On the real estate side of things, Walgreens de-mands premier hard corner locations greater than 1.00 acre. Generally, sites are 1.15 - 1.75 acres to fit their store prototypes of 14,820 SF, although units can range from 10,800 SF - 15,000 SF. To compete with rival CVS, Walgreens has generally been willing to pay premier rental rates to secure prime sites with a primary lease term of 25 years. The most significant lease variation from Walgreens of late has been the differ-ence in their renewal options, previ-ously requiring eight to ten renewal options of five years in length; they re-cently signed a number of leases that were 75 years in length, however after the 25th year Walgreens has an annual cancellation option, essentially creating 50 1-year renewal options. This small variation created significant concern for investors because at the end of the ini-tial 25-year lease term, these assets will not be financeable.n

By: Winston Orzechowski

Walgreens Pharmacy

TENANT SPOTLIGHT:


hEADQUARTERS 11150 sunset hills roaD, suite 300reston, va 20190 t 703.787.4714 • f 703.787.4783

SOUThEAST 4600 W Cypress street, suite 110 tampa, fl 33607 t 813.282.6000 • f 813.282.6098

mID-ATLANTIC 7 foX Den plaZamChenry, mD 21550 t 301.389.9471 • f 301.387.9461

PNC BankWashington, D.C.$1,119.22 psf

Fedex Kinkos Washington, D.C.$809.63 psf

SweetgreenWashington, D.C.$1,089 psf

TD BankWashington, D.C.$977.27 psf

LululemonWashington, D.C.$791.41 psf

Pitango GelatoWashington, D.C.$1,123.64 psf

“Calkain Companies, Inc. has launched a new division that is focusing strictly on urban net lease investments. Called Calkain Urban Investment Advisors, it is launching out of the gate with $20 mil-lion in completed deals and another $30 million the company is currently market-ing.”

“Calkain has sold a slew of ground floor retail condos at Logan Circle’s nearby Metropole. Late last year, an in-dependent private investor snapped up a 550 square-foot ground-floor retail condo occupied by Pitango Gelato for a whop-ping $1,123 per square foot. “

“From retail condominiums to big boxes, Jonathan Hipp views Washing-ton, D.C.’s urban retail market as a place for growth. And with the formation of Calkain Urban Investment Advisors un-der the leadership of Rick Fernandez, previously assistant vice president of Calkain Realty Advisors, he is prepared to be at the forefront of that growth.”

CONTACT NET LEASE ADVISOR

COMPANIES, INC.

CalKain’s reCent Closings & CURRENT hEADLINES

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Net Lease Investments

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