MetroGroup Realty Finance, a private commercial mortgage banking firm based in Newport Beach, California, recently provided a total of $9.2 million in financing to private investors for two separate 1031-exchange transactions involving the acquisition of three single-tenant, triple-net lease assets in Illinois.
“Cap rates have compressed and, consequently, yields have declined significantly in California, so we are increasingly seeing local credit tenant net lease investors seeking higher cap rates and yields on their investments,” said J.D. Blashaw, vice president of MetroGroup Realty Finance. “This search has taken them away from their backyards into other states and sometimes secondary markets, and the passive nature of triple-net leases matches well with these investors’ desire to own properties with little or no management obligations.”
MetroGroup Realty Finance provided $5.8 million in permanent financing to a private investor for the acquisition of a 46,432 square-foot, stand-alone retail building at 5001 N. Big Hollow Road in Peoria, Illinois, as part of a 1031 exchange transaction. The property is fully occupied by a Best Buy retail store.
The 6.25-year, fixed-rate recourse loan at 75 percent loan-to-value features a 25-year amortization and a flexible prepayment provision that expires after three years. The financing was arranged by Blashaw and Ivan Kustic, also vice president at MetroGroup Realty Finance.
“Private investors prefer the lower risk profile of national credit tenants like Best Buy for 1031 exchange transactions—particularly out-of-state transactions where they may not be as familiar with the market and/or tenants,” said Blashaw. “MetroGroup leveraged its long-standing relationship with a lender who has a strong presence in Orange County but is based in the Midwest. The lender was able to get comfortable with the asset due its proximity to the lender’s home base and provide the necessary leverage and competitive rate to meet the client’s investment objectives.”
In the Chicago market, MetroGroup Realty Finance provided $3.4 million in permanent financing to a long-time private investor client for the purchase of two TCF Bank branches. This included $1.825 million for a 2,542-square-foot property at 4160 S. Archer Avenue in Chicago, and $1.575 million for a 2,700-square-foot property at 601 N. Harlem Avenue in Oak Park, Illinois.
Part of a 1031 exchange transaction, the properties are 100 percent occupied by TCF Bank and were sold by Chicago-based Clark Street Real Estate. The loans, arranged by Blashaw and Kustic, were a combined 47 percent loan-to-value and feature a 10-year fixed rate and 30-year amortization.
“Buyers are drawn to credit tenant net lease transactions like this one because of the inherent stability of this asset class and long-term occupancy by credit-worthy tenants,” said Blashaw. “MetroGroup identified a capital source with a national lending platform that was comfortable with an out-of-state borrower, provided aggressive, long-term, fixed-rate terms and was able to meet the exchange timeline. This lender also has an expertise with single credit tenant leases and was comfortable with the bank branches as collateral.”
The credit tenant net lease market has perennially been attractive to 1031 exchange buyers seeking safe, long-term and passive investments for their capital. Due to limited supply and increased competition in the Southern California market, local investors are receiving premium prices on the sale of their commercial properties. However, those same factors are creating headwinds for investors seeking attractive yields on the upleg of their 1031 exchange while trying to stay in their home market, according to Blashaw. He points out that the rise of out-of-state credit tenant net lease demand highlights the ability of firms like MetroGroup Realty Finance to source capital for deals outside of southern California.
“MetroGroup has deep relationships with capital sources that specialize in net lease transactions,” Blashaw said. “Our firm has a transaction history with leading national lenders that are the right sources of capital for this type of investment.”
In addition to geographic diversification, credit tenant net lease investors are also eyeing transactions with features that drive yield in other ways, such as more specialized properties like bank branches, shorter lease expirations and more complex asset classes like retail.