They had 45 days to invest over $13 million

Date: 05/20/2015

Peter Venetoklis grew up in a family business, so entrepreneurship and smart investment is in his blood.  His family’s Brooklyn restaurant sustained two generations but eventually ran its course.

“It was time to convert the asset into cash flow,” Venetoklis confided on a recent #CRE show. “My father and his partners bought the property, a full city block, over 40 years ago. My brother and I ran the restaurant for 20 years.

“After witnessing the downturn, we knew we wanted a strategy for income, also a hedge against another recession. It had to have some safety, and it needed to be clean and easy, since we’re not developers.”

Where’s the Cash Flow?

They chose to buy single tenant net-lease properties in multiple markets. They first determined that single net-lease was a safe bet. With credit tenants, default rates are extremely low.  Then came the choice of market:

“New York is geared toward appreciation more than cash flow,” Venetoklis noted. “We wanted an income stream, and we weren’t willing to forgo several points of cap rate.”

Heading outside of the New York area meant they could invest in several properties. Plus the compelling demographics: population has been moving south.  So, they bought in Kentucky, Texas and Georgia.

How to Choose Tenants

Venetoklis and team looked for companies that would allow rent escalations in the their leases, despite this suggesting a bit more risk. Bigger name stores may have a higher profile, but they don’t pay as well in terms of rent escalations during the term of the lease.

“We found a balance,” explained Venetoklis. “We had a goal: ‘This is the cash flow we want.’ Then the question became ‘how good a company can we get?’”

The single-tenant properties they acquired are Arby's, Appleby’s, Bojangles' Fried Chicken, Kaufman Tire, and a dialysis clinic.

Challenges of a 1031

For the tax advantages Peter and his family paid cash under the 1031 exchange program. I asked if they were going to leverage these properties at a later date.

“1031 is hard enough!” He laughed, citing the strict IRS rules. “We had 45 days to invest $13 million dollars. Actually, I started searching three months before our closing, and researched well over a hundred properties. We submitted 20 LOIs, had 8 accepted, and dropped a few. It’s a tough process.”

It makes sense to put in all cash in a situation like this. It simplifies the process. But they have every intention of leveraging these properties and buying more single nets. Since interest rates are still low, there’s a nice 2.25% point spread between the cap rate and the cost of the money, for an extra incentive. It looks like they have met their goals in every way, by smart and well planned investing.

Tips for Buyers

I asked Peter to share some advice with our listeners, or anyone following in his footsteps:

1.      Assume everything will take longer than you expect.

2.      Push! If you want something, don’t give up.

3.      Get a good team and listen to what they have to say.