Incremental Development’s first quarter acquisition was a mixed use added value project. This off market property was identified by I.D. at the...

Incremental D II’s first quarter acquisition was a free-standing, single tenant, triple-net (NNN) lease project. This off market, restaurant franchise location was identified by I.D. at the very beginning of first quarter FY 2009. The seller’s current annualized net operating income for the asset as directly correlated to the annual rent was $137,016. Based on that annualized rent, the original list price for the asset was $1,851,568 or a 7.4% cap rate. Incremental negotiated an offer that was accepted by the sellers of $1,550,000 or a “going in” 8.84% cap rate. The lone mandate imposed on the Incremental by the seller was that in order to honor this pricing, I.D. had to close on the sale of the property prior to the end of the first quarter 2009. After careful review, current market comparables suggested that this asset could fetch a 7.4% cap on the open market. Thus stated, the overall analysis indicated that Incremental Development would add nearly $302,000 worth of equity to their portfolio by virtue of the acquiring the property.

The following factors provided the basis of our internal underwriting and ultimately earmarked this asset as being ripe for acquisition. Respective to this location, the tenant, Arby’s, is in the near middle of performing on an initial twenty (20) year lease term with two additional five (5) year options. The lease calls for 2% annual rent bumps over the remainder of the initial lease term and the two 5 year option periods. The terms of the lease and any payments made there-under are backed by Wendy’s/Arby’s Corporation. Arby’s, which recently merged with the Wendy’s brand, in combination with Wendy’s comprises the third largest restaurant franchise group in the country. Effectively, unless Arby’s/Wendy’s corporation is declared insolvent or adjudged bankrupt, rental payments that were contractually negotiated when the lease was signed are due and payable to Incremental Development regardless of whether or not Arby’s continues to operate their business out of the location. Incremental was provided with a clean environmental phase I (21E), demonstrating that there are no environmental concerns associated with the site. In store sales for this location were tracked over the last three years. When charted, the in store sales data revealed that during 2008 the store was on pace to achieve in store sales of $1,350,000.  As the average national Arby’s location achieves in store sales between $900,000 and $950,000, this particular asset is outperforming the average location by nearly 40%. As it pertains to the physical location of the building, the asset is located on a pad site to a large shopping center and is directly accessed via an “off ramp” of I-75 in Allen, Texas. The average daily traffic count (ADT) is 77,000 cars per day. Signage, in close proximity to the exit, promotes the location in both the northbound and southbound lanes of the highway.

Procuring bank financing for the acquisition, given the state of the capital markets, at the outset of the year was a challenge. Nationally, lenders were burdened by the well documented credit crisis and the criteria by which this class of asset was typically financed were changing on a daily basis. I.D. took advantage of its lending relationships to procure financing for the asset on the following terms. The terms that were originally quoted reflected a 65% loan to value (LTV) ratio on the $1,550,000 purchase price, I.D. negotiated the interest rate down to 7.14%. Incremental then re-negotiated the sales price, with the seller discounting the sales price of the asset by $30,000.  A final sale price of $1,520,000 was negotiated resulting in the addition of $332,000 worth of additional equity for Incremental on the acquisition. The “going in” cap rate for the asset based on the new pricing increased from 8.84% to 9.01%. I.D. closed on the acquisition of the asset on March 26, 2009.

In analyzing the financial aspects of the acquisition the following factors are relevant. Arby’s is responsible for paying a first year gross annual rent of $137,016. Annualized debt service for the loan is $85,380. This leaves Incremental with a first year annualized net income after debt service of $51,636. Thus, the first year return on equity (cash on cash returns) during the period precedent to the rent escalator date is 9.93%.  After accounting for 2% annual escalators over the first five years of ownership the average five year return on equity is 11.01%. After accounting for the same over the first ten years of ownership, I.D. will experience a ten year average return on equity of 12.43%.

DIVESTED 2011