Ever wondered how to break into the exciting world of commercial real estate? In this episode of NNN Notes with Kristian Cotta from Hungry Investments he chats with Reggie Wakoma from Wakoma Capital to dig into questions Reggie has as an aspiring young commercial real estate investor. The conversation leads them down a path where Kristian attempts to decode a mysterious term for Reggie – the covered land play. Buckle up, aspiring commercial real estate investors, because we’re about to unveil the secrets behind this valuable strategy!
What is a Covered Land Play?
Imagine a prime location with a vacant building. It might seem like a goldmine waiting to happen, but the plot thickens. The property boasts a long-term lease with a national credit tenant, making it a stable income source. So, why would the owner sell? This is where the covered land play looms heavy.
Kristian explains that a covered land play identifies properties ideal for future development.
While the current use might not maximize the potential, the land holds immense value for future projects. The key lies in acquiring the property at a price that considers the existing lease and factoring in the future development’s projected income.
Breaking Down the Numbers: Making a Covered Land Play Work
Let’s get down to the nitty-gritty. Here’s what Kristian highlights to make a covered land play successful:
Lease Term Impact: If the remaining lease term is less than ten years, the property’s value is determined by the cap rate for short-term single-tenant net leases.
Tenant Creditworthiness: The future development’s projected income should surpass the existing lease’s rent. Consider factors like the creditworthiness of potential tenants for the new development.
Negotiating Lease Buyouts: Vacant buildings often incentivize tenants to seek a lease buyout. Kristian suggests offering a buyout window of 2.5 to 3 times the annual rent (depending on the remaining term), giving the tenant savings while securing the property for development.
Long-Term Vision: Remember, a covered land play is a waiting game. While the existing lease generates income, the true reward lies in the future development’s potential.
Challenges and Considerations
The conversation doesn’t shy away from the challenges. Reggie asks about the likelihood of tenants accepting a lease buyout. Kristian highlights that most tenants prefer to exit a vacant property, making them receptive to negotiations, especially with a strong incentive.
Another crucial factor is identifying sellers who might be motivated. Debt pressures or upcoming lease expirations can make owners more receptive to offers. Additionally, some sellers might overvalue a vacant property with a lingering lease. Careful due diligence is essential to avoid overpaying.
Finding Deals and Building Relationships
So, you’re eager to start uncovering covered land plays?
Here’s Reggie’s burning question: HOW DO YOU SOURCE THESE DEALS?
Kristian acknowledges the challenges of breaking into the retail real estate sector. It’s a relationship-driven industry, and building trust with brokers and property owners is paramount. Valuable tools like Placer.ai can aid in research, but they come at a cost. Alternative options include other resources like CoStar and Crexi, along with classic methods like public record searches.
Conclusion: Unveiling Your First Deal
The good news? You don’t need a fortune to get started. Building relationships, persistence, and resourcefulness are key. The first deal might be the toughest, but with dedication and the right guidance, you can break into the thrilling world of commercial real estate.
Stay tuned! In the next episode, Kristian and Reggie will delve deeper into securing your first commercial real estate deal. They’ll explore strategies for deal sourcing, presentation techniques, and potentially even collaborate on calls to showcase the practical application of these concepts.
This first video and article just scratches the surface of covered land plays and getting started with commercial real estate investing. Remember, knowledge is power.
Keep an eye on the Hungry Investments YouTube channel for the next episode and embark on your commercial real estate journey alongside Reggie!
Valuable Resources
Hungry Investments YouTube Channel
/@hungryinvestments
Placer.ai (commercial real estate data platform)
https://www.placer.ai/
CoStar (commercial real estate marketplace)
https://www.costar.com/sites/costar.com.na/files/2023-09/costar_buildingratingsystem-definition.pdf
Crexi (commercial real estate marketplace)
https://www.crexi.com/
