Courtesy Flickr Creative Commons user jimg944

By: Barbra Murray, Contributing Editor

Wineries and vineyards are about to become a big part of Realty Income Corp.’s portfolio now that the Escondido, Calif.-based real estate company has entered into a definitive purchase agreement with Diageo Chateau & Estate Wines. Realty Income will plunk down $269 million for two vineyard properties in Napa, Calif., and will lease them back to DC&E under guarantee by the wine company’s London-based parent company, Diageo Plc. Realty Income’s sale-leaseback transaction with DC&E is on track to close no later than June 30.

The transaction involves DC&E’s Sterling Vineyards winery (pictured) and Beaulieu Vineyards winery, which feature an aggregate 2,000 acres of vineyards, as well as buildings encompassing the wineries, production space, visitor centers and retail space for a total of approximately 400,000 square feet. Under the 20-year, triple-net lease agreement–which offers extension options for up to 60 additional years–the wine company will continue to manage and operate the properties. Realty Income is not going into the wine business; DC&E will still own and market its wine brands and products.

Companies owning self-occupied real estate continue to turn to sale-leaseback transactions in order to pocket cash in a hurry while staying put in their own digs. Such deals, however, are not as popular as they were a few years ago when investors could obtain credit for such acquisitions more easily. According to Real Capital Analytics Inc., sale-leaseback transactions for office, retail and industrial properties reached a six-year peak of $15 billion in 2007 and dropped to a six-year low of approximately $3.7 billion in 2009.

But the deals appear to be on the rise again. “U.S. sale-leaseback transaction activity in 2010 should easily top the amount recorded last year, but will still be well off from the totals seen in the middle of the last decade,” Dan Fasulo, managing director with Real Capital Analytics, told CPE. “Yet in the current risk-averse climate, many investors are attracted to the sale-leaseback format due to the perceived low risks involved when there is an established tenant.” Halfway through the year, office, retail and industrial property sale-leaseback transactions have already surpassed $2 billion.

Tulsa, Okla.-based net lease brokerage firm Stan Johnson Co. has completed the $62.7 million sale of a 20-property retail portfolio fully occupied by CVS/pharmacies.

The portfolio, which entails more than 248,000 square feet, has properties located in Alabama, California, Connecticut, Florida, Georgia, Illinois, Massachusetts, Michigan, New Hampshire, Pennsylvania, Texas and Virginia.

Jeff Hughes and Brandon Duff of Stan Johnson represented the buyer as well as the seller, both of whom were Texas-based. When announcing the news, Hughes said that the buyer was attracted to this particular deal given that the properties were highly leveraged and well suited to meet their particular needs.

He added that the company has several comparable transactions in the pipeline exceeding $150 million, with properties boasting long-term, bond-style leases with investment-grade tenants.

As part of its continuing expansion efforts, Stan Johnson recently opened a new regional branch in Chicago, appointing Duff as lead broker and associate director. The firm focuses exclusively on acquisition, disposition and financing of net-leased real estate in the retail, office, industrial and medical product sectors.

 What a difference a few years and a good lease make. Four years after its $25 million acquisition of the then-vacant 490,000-square-foot office complex at 550 King Street in Littleton, Mass., a joint venture of Angelo Gordon & Co. and National Development has sold the fully leased asset to Wells Real Estate Investment Trust II Inc. for $85.5 million in an off-market transaction. Home to IBM’s regional headquarters, the property holds the title of the largest software campus in Massachusetts.

Consisting of two connected three-story structures, the IBM Littleton campus occupies an approximately 40-acre parcel in the I-495 technology corridor about 30 miles northwest of Boston. The property was originally developed for Digital Equipment Corp. in 1984, and underwent an extensive renovation in 2008. New owner Wells REIT has committed to financing tenant improvements to the tune of $5.5 million for IBM, which occupies the entire complex under a net lease agreement that runs to 2020.

For Norcross, Ga.-based Wells REIT II, the most valuable feature of the asset is its occupant. As noted in a report filed by Wells REIT II with the U.S. Securities and Exchange Commission, “the financial condition and results of operations of the tenant, IBM, is more relevant to investors than financial statements of the property acquired.” With the purchase, the office REIT’s portfolio now encompasses 91 buildings accounting for an aggregate 21 million square feet in 23 states and Washington, D.C. The buildings are 96 percent leased on average, a performance that outpaces the national office market by a wide margin. By the end of 2009, the average office vacancy rate had reached 17 percent, according to Marcus & Millichap Real Estate Investment Services Inc.

The Matrix

By Suzann D. Silverman, Editor-in-Chief

From retail condominiums to big boxes, Jonathan Hipp views Washington, D.C.’s urban retail market as a place for growth. And with the formation of Calkain Urban Investment Advisors under the leadership of Rick Fernandez, previously assistant vice president of Calkain Realty Advisors, he is prepared to be at the forefront of that growth.

“Everybody is mentioning urban as the next hot area,” said the president & CEO of Calkain Cos. “Not just the smaller boxes. Even the big boxes—Target, Kohl’s, JC Penney—all want to infill the urban markets.”

While Calkain has already made inroads in that business, with 10 transactions valued at more than $20 million completed and $30 million in current listings, Hipp is confident enough in the potential that the division has hired one new MBA and is currently interviewing others to fill out the team. “This is a division that definitely has legs,” he said.

Having a separate division, he added, provides a benefit because it emphasizes the company’s specialization in the area. And urban retail, whether in Washington or elsewhere, does come with characteristics different than its suburban cousin. There is, for instance, a growing incidence of retail condominiums on the ground floors of mixed-use complexes as well as the more traditional office building. “It’s a different kind of sell,” Hipp said. It also has the potential to attract some new types of buyers, those both domestic and foreign that want to invest in urban markets but do not want to make huge purchases. “(Having properties) as small as $1 million and up opens the market to a tremendous amount of people,” he noted.

In most sports, coaches use specialists to deal with pressure situations. In football, for example, they will bring in a slash-type runner on offense to cross the goal line or a pass rusher on defense to sack the quarterback. These specialists have specific skills and in many cases prove to be the difference between victory and defeat.

For those in real estate, and particularly with Stan Johnson Co., specialization is the maxim for those that want to succeed in these trying times and get deals closed, no matter what the size or complexity. Sellers are looking for brokers “that can make it rain”–in other words, that can find hidden opportunities. In our case, the only deals we do are single-tenant net-lease transactions. We have carved a niche in the market where we are known as “The Net Lease Authority™.”

Utilizing a specialist or a group of specialists affords sellers the day-to-day contacts, insights and perspective that brokers in a specific area possess, allowing them to be creative and find opportunities that others may not know exist. Now more than ever, in this recent market, we are seeing the need to find more creative solutions to meet complex problems. Due to our expertise and our knowledge of available single-tenant properties and players across the country, we were able to align the right investor with the most suitable single-tenant property that meets the objectives for everyone.

We have been able to leverage our frequent contacts with active players in the industry. Many off-market deals are initiated as our brokers talk with owners who share that they would indeed sell their property if we found them the right buyer and the right price. Firms that are not actively engaged with the market players and do not frequently communicate with property owners in their particular line of business are unaware of current and future needs that are the source of hidden opportunities. Single-tenant property owners that engage brokerage firms that do not specialize in this niche, or employ a local general real estate agent, cheat themselves of the many benefits a single-tenant specialist can provide.

Another benefit of specialization comes into play with the financing required to make the deal work. Along with our capital markets team, our brokers have the knowledge of available debt and terms today. We have the expertise to assist clients in designing and executing innovative transactional solutions to finance and control their real estate. Our solutions are uniquely designed to achieve specific cash flow and financial statement objectives, promote efficient use of capital and credit resources, and mitigate tax burdens.

The net lease investment property is unique in the fact that the value of the deal involves more than just the real estate. Specialization is extremely beneficial when it comes to other critical elements that go into these deals. A firm that focuses exclusively within the single-tenant industry is much more qualified to understand how the tenant’s credit, comps and key provisions of the lease structure can all affect the potential investor’s interest in a certain asset. A specialist has the knowledge and laser-like focus to know market conditions and other key factors that in the end determine a property’s true value.

In summary, specialization in the net lease niche offers clients the best source of hidden opportunities and the most qualified buyers, the best financing solution and the knowledge and expertise to evaluate the true value of an investment deal.

Stan Johnson is CEO of Stan Johnson Co., a 20-year-old company whose net lease group focuses exclusively on the acquisition, disposition and financing of net-leased real estate.