Leveraging Commercial Real Estate “A Team” For Success In Investing
Regardless of whether you are doing one deal - or a dozen - Your A Team plays a critical role in creating immense value and avoiding costly mistakes.
Leading edge companies recognize the importance of leveraging human capital to achieve their goals, whether that is developing a hot new software program or designing a better mousetrap. Building a talented team is key to recognizing opportunities and addressing any challenges that may arise. The same is true for investing in triple net lease (aka NNN) properties.
Investors need to surround themselves with strong players that include a CPA, real estate attorney and real estate broker. Everyone brings their own unique skillset to the table to help move an investment forward from start to finish. Regardless of whether you are doing one deal – or a dozen – that A Team plays a critical role in creating value and avoiding costly mistakes.
What skillsets should you look for in that A Team? Ideally, you want seasoned, experienced experts in their disciplines. They need to be problem solvers who are adept at dealing with any complexities that might arise in a transaction. In the real estate industry there are often blurred lines. Parties can withhold information that should be disclosed, or perhaps certain situations may not seem alarming at the surface could balloon into full-scale issues. Thus, it is especially important to collaborate with advisors who have the expertise to pierce through the situation, act with strong ethics, and who are firmly committed to their fiduciary duty to represent your best interests.
Experts in Your Corner
In real estate, fortunes can be made or lost in the most minute detail. That is exactly why it is so important to have the best talent working on your behalf to accomplish key goals that include:
Source & close deals: Net lease investing can be viewed as a bit of a jungle with thousands of potential investment opportunities across the country. Yet more than 80% of deals are not worth considering (the 80/20 rule). Potential opportunities can be eliminated for a myriad of reasons, such as properties that are not priced correctly or they are not a fit for your investment objectives. In addition, not all for-sale real estate opportunities are publicly marketed. In fact, some of the most prized/attractive deals are hidden behind the scenes in off-market opportunities. An experienced, reputable, well-connected broker can help you source deals that match your investment objectives, and even help to identify those off-market gems.
Navigate complex transactions from end-to-end: No deal is ever straightforward. There will always be unforeseen circumstance that pop up during discovery and due diligence. For example, there may be an unforeseen environmental issue, property easement or even an unclean title that could derail a deal. Whatever the situation, you need an A Team that can help you navigate through the issues to find solutions and complete the transaction.
Investment Success: Your team needs to be aligned around a common goal of not just closing a deal and earning their respective fees but understanding the bigger picture of your investment strategy. That A Team needs to apply their different skillsets to help you figure out the best course of action for your investment objectives over the short-term, mid-term and long-term. Specifically, the team helps to provide information and guidance on an investment across its entire lifecycle, providing value on key issues such as when to buy, what to buy, how long to hold and when to sell. The team that you build helps you assess the merits of each deal, dissect the pros and cons and determine both the qualitative and quantitative implications for each option.
Assembling your A Team
When assembling that A Team, it’s important to understand what they bring to the table, and how it will help you as an investor. Investors that are buying a net lease investment property as part of a tax-deferred 1031 Exchange rely heavily on their A Team of professionals due to the added complexity required in completing all of the necessary steps to execute the exchange. One misstep could blow the exchange entirely, potentially resulting in tens of thousands of dollars in taxes owed to the IRS.
For example, an investor purchases a property in 2015 for $1,000,000. Six years later, the property has appreciated to $2,300,000 and the investor decides to sell. After adjusting for basis, depreciation, capital improvements, transaction costs, etc. the capital gain from that sale is $750,000, which would mean a hefty tax bill for an individual. Rolling the proceeds of the sale into a 1031 Exchange allows a seller to defer this gain indefinitely, forever in some cases, as long as that money is used to buy a qualifying “like kind” replacement property or properties.
In addition to working with a good CPA, attorney and real estate broker, 1031 Exchanges require the extra expertise of a 1031 Exchange Accommodator (aka Qualified Intermediary or QI). The QI is a person who holds funds from the relinquished property and uses them to acquire the new replacement property. According to IRS rules governing 1031 Exchange transactions, funds from the sale of a relinquished property is not allowed to flow directly to seller. Those funds must be managed through an independent third party – the QI. A good QI will ensure that the paperwork trail for your 1031 Exchange is spotless, that you are in full compliance, which is essential to executing on your 1031 Exchange transaction.
Choose a NNN specialist
Commercial real estate is a large industry with numerous sectors and sub-sectors, each with their own nuances. For example, the fundamentals that drive investment analysis in a self-storage property or an apartment building are vastly different than a NNN asset. As such, it is important to find a real estate broker who has proven expertise in the net lease sector. If you needed heart surgery, you wouldn’t seek out a general practitioner to perform the operation, you would find the top cardiologist. The same principle applies to NNN real estate investment. In fact, there are even sub-specialties within NNN that allow you to hone in even further if you are looking for an expert who has experience dealing with a specific category or brand, such as dollar stores, convenience stores or fast casual restaurants. Investors can reap the benefits of their broker’s past experience with a tenant such as Dollar General or 7-Eleven, because a broker understands the latest market dynamics, valuations and cap rates, as well as how those corporations structure leases.
It is important to choose a NNN broker that has:
Demonstrated experience in the NNN lease market
Understands the latest market trends and is able to assess market implications on property value, investment potential and short to long-term profitability
Strong reputation and high ethical standards
A solid track record of helping clients successfully execute their transactions
Can work seamlessly with other members of the investment A Team
Touchstone Commercial Partners checks all of those boxes and more. In addition to having the market knowledge and technical chops to dissect data and identify key questions to address during due diligence, we work diligently in the best interests of our clients. Our mission is to do more than guide clients through a particular transaction, but to truly partner with investors in their long-term investment journey. If you are interested in learning more about triple net lease assets and whether NNN aligns with your investment objectives and lifestyle goals, contact Andrew Vu at 415-539-1120 for a free, no-obligation NNN consultation.