Cap rate 8.75%

Incremental D IV’s first quarter acquisition of 2010 was a free-standing, single tenant, triple-net (NNN) lease project. This asset was identified by I.D. at the end of fourth quarter FY 2009. The seller’s current annualized net operating income being $134,842. While monitoring the market, and seeing that these assets were trading at between 7.8-8.25% caps, Incremental negotiated an offer based off of the NOI, that allowed for them to acquire the asset at an 8.75% cap. 

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, Advance Auto Parts, is 13 years into an initial twenty (20) year lease term with two additional five (5) year options. The building being one that was newly constructed in 2007. The terms of the lease and any payments made there-under are backed by the Advance Stores Corporate guarantee. Advance Auto comprises the second largest auto parts franchise groups in the country. Effectively, unless Advance Auto Parts 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 Advance Auto's continues to operate their business out of the location. Incremental was provided with a clean environmental Phase I, and Phase II, demonstrating that there are no environmental concerns associated with the site. In store sales for this location revealed that the store was also over performing the AUV. As it pertains to the physical location of the building, the asset is located 20-25 minutes from Reliant Stadium, on an intersection that is neighbored by such tenants as CVS, and Wells Fargo. Also directly across the street is located a large shopping center. The average daily traffic count for the asset (ADT) is 55,000 cars per day.

Procuring bank financing for the acquisition, given the state of the capital markets, at the outset of the year was a challenge. I.D. took advantage of its lending relationships to procure financing for the asset on the following terms: 70% loan to value (LTV) ratio on the $1,541,051 purchase price, of which I.D. negotiated the interest rate down to 5.75%, amortized over a 25 year period. The “going in” cap rate for the asset based on the new pricing increased from 8.75%. I.D. closed on the acquisition of the asset on April 7th, 2010.
In analyzing the financial aspects of the acquisition the following factors are relevant: Advance Auto Parts is responsible for paying the remaining term on the initial lease, in annual rents of $134,842. Annualized debt service for the loan is $81,048. This leaves Incremental with a first year annualized net income after debt service of $53,794. Thus, the cash on cash return on equity (cash on cash returns) during the period of ownership is 10.47%.

Less than one month after ID acquired the asset, Advance Auto Parts received a credit bump by the S&P, from BB+ to BBB-. Taking the asset's credit into investment grade, and adding substantial value to the asset itself, to be unlocked upon divestiture. 

Cap Rate 10.30% on a 2009 NOI

Incremental D III's third quarter acquisition was a free-standing single tenant, triple-net (NNN) lease project. This off market, restaurant franchise location was identified by ID midway through the third quarter. The following elements helped foster Incremental Development’s acquisition strategy and further reinforce that this asset was ripe for acquisition: Of significant note is the fact that the lease maintains a corporate guarantee, whereby, 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.

  In addition to the corporate guarantee, there are still 8 years remaining on the initial lease term followed by 2 additional five year options with 5% base rent bumps at 5 year intervals during the initial term and at the inception of each option period. This fact is particularly relevant regarding ID’s short term hold strategy and will be subsequently discussed in further detail. The rent for this asset is paid as a function of both base rent and percentage rent. ID strategically engineered the financing that it procured in acquiring the asset to ensure 100% debt service coverage solely by virtue of the base rental payments. In addition, ID’s significant upside potential was conservatively underwritten by charting the last three years worth of sales figures in addition to FY 2009 year to date sales figures.

Per the terms of the lease, once in store sales figure reach $736,000, ID is contractually entitled to receive 8% of annual gross sales in excess of that number as percentage rent above and beyond any base rental payments. As this particular Arby’s is projecting to achieve sales in excess of 1.2 million dollars or nearly 30% above average unit volume (AUV), Incremental Development conservatively was able to present a model that returned a better than 10% cash on cash return to its partners. In addition, the ask price for the asset, in a cap rate driven industry, was predicated on 2008 sales figures which were lower than 2009 sales figures as sales have continued to experience a significant year over year upward trend.

By acquiring the asset at this point in time, ID was able to harness the intrinsic value in the deal by acquiring the asset on what is effectively 2008 pricing with $247,000 worth of equity built into the deal. As stated, the strategy with regard to this asset is to continue to bolster the NOI and divest the asset in the first quarter of FY 2011. This will enable Incremental to experience the benefit of the percentage sales over 2009 and 2010, book the depreciation during its ownership of the asset and re-trade the asset in 2011 at a highly competitive cap rate.

In completing all company mandated due diligence on the asset, an Environmental Transaction Screen, Survey and Title report were ordered in addition to an extensive site visit. The results of those third party reports clearly indicated that the property was environmentally clean and free and clear of potential encumbrances.

Lastly, because of our commitment to close this deal in a timely manner the deal cycle took 27 days from identification to acquisition clearly denotes Incremental’s industry savvy and its ability to quickly mobilize its resources when opportunities in this rapidly changing economic environment present themselves.

Cap Rate 9.01%

Cap Rate 11.30%

Incremental Development’s first quarter acquisition was a mixed use added value project. This off market property was identified by I.D. at the beginning of the fourth quarter in FY 2008. The property consisted of a 5,664 square foot, nationally recognized, day care facility (“Kindercare”) and a 1,503 square foot single family residence. Both properties were situated on the same 40,075 square foot (.92 acre) lot. The Kindercare location had just completed its initial eighteen year lease term and had recently exercised the first of two five year options. The current tenants of the single family have resided there for 13 years as Tenants at Will. The initial asking price for the asset was $650,000. Incremental negotiated a final sale price of $600,000 for the asset.

It was the objective of Incremental from the outset of the project to acquire the property with the intention of subdividing the single family from the day care facility. Legal counsel and a local civil engineering firm were retained to begin the process of preparing a code compliant site plan that would have the greatest likelihood of being approved by the municipal planning and zoning boards.  “As Is” and “As completed” appraisals were ordered and confirmed that the “As Completed” value of the property, in subdivided form, would be of far greater value than the “As Is” value of the two structures on the same lot. The appraisal reflected the “As Is” fair market value (FMV) of the whole to be $600,000, while the subdivided “As Completed” appraisal reflected a FMV of $740,000. Appraised values of $565,000 and $175,000 were respectively assigned to the day care facility and the single family. A property inspection and further research revealed nearly $50,000 worth of sewer and other site improvements were necessary to effectuate the subdivision of the lot. By virtue of subdividing the lot into two separate and distinct lots Incremental increased their equity in the property by $90,000. This figure is extremely relevant in terms of how the financing on the property was structured.

A financing commitment was obtained via a Massachusetts based bank. The final terms reflected a 75% loan to value (LTV) ratio on the $600,000 purchase price, and a five year fixed rate of 6.25% on a 25 year amortization schedule. Incremental was responsible for a 25% equity contribution of $150,000 and lender origination fee of a half a point on the loan amount. The lender agreed to finance the additional $50,000 worth of funds for the required site improvements. Incremental insisted and the bank agreed to the caveat that the funds would not be released until the subdivision was approved . This was done to avoid paying for the additional debt service until the site work could commence after April 1, 2009. Another rationale for this structure was due to a seller mandate that the sale had to be consummated prior to December 31, 2008 and the fact that the City Planning Board could not procedurally hear this matter until after the closing took place. Incremental obtained all of the requisite municipal subdivision approvals post-closing and the site work began in the spring of 2009. Incremental plans to begin marketing the single family for sale during the fourth quarter of FY 2009 in anticipation of selling it after January 1, 2010. As the acquisition was consummated on December 31, 2008, Incremental will maintain ownership of the single family for at least one calendar year to avoid short term capital gains tax on the sale of the asset.

In analyzing the financial aspects of the acquisition the following factors are relevant. The property has a gross annual rent of $73,563. Of this figure, Kindercare pays a current annualized rent of $65,763. The balance is accounted for by the single family which pays an “under-market” current annualized rent of $7,800. It should be noted that there is a ten percent rent escalator for the Kindercare that is realized when the second five year option is exercised. Annual expenses for the property excluding debt service are $5,738. Thus, the property has a net operating income of $67,825. The “going in” capitalization rate (cap rate) for the asset is 11.30%. Annualized debt service for the loan is $35,912.  Net Income after debt service is $31,913. This provides Incremental with a return on equity of 20.96%. (See Income and Expense Statement) Please note: The return on equity excludes the $90,000 of additional equity achieved by Incremental as reflected by the appraisal of the single family post-subdivision.