So, we've got an old office building that's being fully vacated in an urban, densely populated area. We're in discussions with the local school board about building out the shell for a badly needed public school. In theory, the lease would be a 30-year absolute NNN lease (county takes care of 100% of OpEx and CapEx, as if they owned the building) with regular, pre-determined rental escalation. We can easily obtain 30-year financing for the "TI" (really, a total gut rehab). Since we know--in theory--the EXACT cash inflow (rent) and cash outflow (debt service) each year and since the owner/investor takes a completely limited role in management/maintenance (i.e. no role whatsoever), could we sell the stream of cash flows in a lump sum? The county has a AAA bond rating.
Would there be a market out there for purchasing such an investment? Since I've never heard of this being done (maybe I have--federal government leases?), my assumption is that it would be a very limited market--and with a limited market comes reduced liquidity, which brings lower prices. Maybe insurance companies?
I've heard of this before, but it is a limited market. In my opinion, the credit rating would put investors at ease. I would think that something like this trades 150ish bps wide of what the county's bonds trade. If i had to guess, this could trade at something like a 4.0-4.5ish YTM. 20yr AAA muni bonds are trading at like 2.5%. if you add in the liquidity premium in general for the deal plus more premium for the additional 10 yrs you get there. If I was a NNN investor, I would rather get my hands on something like this instead of a shit ton of red lobsters. Best bet is a broker out of NYC. PM me and I can share his contact info. i worked on a deal with him that had similar characteristics when i was on the broker side a while back. pretty good chance that he won't remember me but he will remember the deal.
There is a market for this but I honestly don't know much about it. I actually just asked this same question to our cap markets team.
Most brokerages have a cap markets division that could handle a transaction like this.
Why not just sell the fully-leased building?
Thanks for your input. Good to see confirmation from a second source that suggests that this is at least not a pie-in-the-sky idea.
To your question, for better or for worse--it's never my call either way--our principals' philosophy is to (almost) never sell, especially assets in prime locations, so any suggestion of the sort would simply fall on deaf ears (principals want to pass this asset onto their progeny into perpetuity). In this case, however, it probably doesn't make sense to sell since we own the adjacent parcel, which we want to combine into one large parcel in order to maximize density from the county (want to put up to 800 apartment units on the combined site). Plus there is virtually no depreciable basis remaining after 30+ years of ownership, so taxes would be substantial.
Here's an interesting article on it. It was written fairly recently: https://commercialobserver.com/2015/09/the-1-trillion-idea/
Really interesting article. It got me thinking about the "business logic"--a term a commenter in the article uses--of securitized commercial leases. I don't see a lot of "business logic" on a wide scale--I see it as a niche need in certain narrow circumstances (such as ours where we don't want to sell but it would be nice to have a lump sum cash payment).
I can see why investors would love it, however. To StanCRE's point, at least the government leases--setting aside appropriations risk for the time being--would likely trade at yield premiums to their bonds. Imagine an investor choosing between a 2.5% D.C. municipal bond or a 4.25% "lease bond" backed by a D.C.-backed lease--it would be essentially the same credit risk with a considerably higher yield (again, setting aside appropriations risk).
Can you 1031 proceeds into a structured product like this? You don't hold title to either the fee or leasehold interest. You just have rights to future cash flows.
I know you can 1031 proceeds into a REIT through the process of upREIT-ing, but you then can't 1031 out of the REIT back into hard real estate--if you sell the shares you must pay capital gains taxes (if applicable). At least that's how I understand it.
We've invested in TNL ABS, but those are granular, diversified portfolios. The largest issuer of these is STORE Capital Corp, you can find presale reports on S&P's web site.
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