JF1735: Going From Active Investor To A More Passive, Triple Net Lease Strategy with Alan Fruitman
Alan helps his clients own properties and lease them as triple net leases to commercial tenants. His clients are able to purchase properties nationwide through Alan, which his team personally vets before bringing them to his clients. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
“You might get a little higher cap rate because its a strong B tenant and not an A, but you made up for it with the security that the incredible location will bring to you” – Alan Fruitman
Alan Fruitman Real Estate Background:
- Owner of 1031tax.com and author of “The NNN Triple Net Property Book”
- Has helped investors purchase more than $1 Billion of single tenant, triple net leased investments
- Based in Denver, CO
- Say hi to him at https://1031tax.com
- Best Ever Book: Two Page Marketing Plan
If you’re a passive investor wanting to learn more about questions to ask sponsors in order to qualify the opportunities, sponsors, and the markets opportunities are in, visit BestEverPassiveInvestor.com.
We created this site just for passive investors to have a free resource providing the questions to ask and things to think through. BestEverPassiveInvestor.com
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Alan Fruitman. How are you doing, Alan?
Alan Fruitman: Excellent, thank you. Nice to be with you this morning.
Joe Fairless: Yeah, nice to have you on the show. A little bit about Alan – he is the owner of 1031tax.com, and author of The Triple Net Property book. He’s helped investors purchase more than one billion dollars of single-tenant triple net lease investments. Headquartered in Denver, Colorado. With that being said, Alan, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Alan Fruitman: Thank you. My focus is very small. I help a target audience of investors looking for passive income, and the type of properties we sell are single-tenant, triple net lease properties. These properties range from pharmacies, Walgreens or CVS, restaurants, McDonald’s, Taco Bell, Chipotle, dollar stores, auto parts… Lots of the same retailers you see when you drive down the street – those are the properties my clients purchase.
Joe Fairless: I mentioned in the first line of your bio that you’re the owner of 1031tax.com… I’m gonna guess – and then please elaborate more – that you work with a lot of investors who used to be active, made some money, looking to 1031 that money into something that is passive, and therefore you connect them with a triple net lease property. Is that basically the business model?
Alan Fruitman: That is the model. Many of my clients come out of apartment buildings or shopping centers, office buildings, even land… They do a 1031 exchange into something much easier to manage; long-term leases with no obligations for the landlord.
Joe Fairless: Do you ever work with any of your investors who say “Alan, I’ve got some money, I’m an active investor. I do want to be passive, but I’d like to still get some of the financial benefits of a value-add deal.” So is it possible to get the best of both worlds? A passive investment via a triple net, while also incorporating value-add?
Alan Fruitman: It’s not, no. The triple net properties – there’s really no value-add. It’s considered mailbox money. You buy the property, you have a long-term lease, long-term meaning 10-20 years on the primary term. The tenant will have multiple renewal options, going 20+ years for options of renewal. There’s really no value-add. The concept and the focus is passive. Value-add is a great component of real estate, it’s just different from what this type of property entails.
Joe Fairless: Are you a broker?
Alan Fruitman: I am a broker, and my clients purchase these triple net properties nation-wide.
Joe Fairless: So how do you find the triple net lease properties to match up with your clients?
Alan Fruitman: One thing that’s unique about my model – and there’s really nobody in the country that does it the same way that I do… What’s unique is we only represent buyers on this national level, and the properties come to me from owners, developers and brokers all over the country. My team and I receive usually more than 200 properties every day, and we sift through these properties and pick out the best of the best of the best, and we send an e-mail to our investors of these properties every day; Monday through Friday, my clients receive an e-mail of new properties that come to market.
Joe Fairless: And the new properties that you share – are those the ones that have already been filtered out, or have those passed the filtration process? Or do you share all 200 that you receive every day.
Alan Fruitman: No, they are filtered of 1) location, 2) strength of tenants, and 3) length of lease. The properties start around a million dollars on the low side, and go much higher than there, but our sweet spot is the 1 to 10 million market points.
Joe Fairless: Okay. And what did you say – location, strength of tenants, and what was the third?
Alan Fruitman: Number three is length of lease.
Joe Fairless: Length of lease.
Alan Fruitman: We try to focus on longer-term lease properties. It’s a different marketplace for the shorter-term lease properties. When you want a passive investment, the longer horizon is usually more appealing to our clients.
Joe Fairless: Do you prioritize it in that order, 1-2-3?
Alan Fruitman: Yes. It all comes back to real estate fundamentals. Location is number one. We want a location where the current tenant will thrive, but we also want a marketplace where when the tenant eventually vacates, it’s highly likely and easily re-tenanted. And specifically, we look for retail corridors where the tenants and the property is surrounded by many other prominent retailers. We want that stretch where you’re surrounded by Walmart, and Kohl’s and Home Depot, and Lowe’s, and McDonalds, and Chase Bank, and all the other national retailers. That prominent corridor is what we look for.
Other attributes would be near university, a big hospital, a highway exit… Permanent fixtures that aren’t trendy, that will pass the test of time.
Joe Fairless: Okay. And then what about the second thing, strength of tenants? How do you qualify that?
Alan Fruitman: Well, after location, the second most important feature would be strength of tenant. If it’s a corporation, we wanna make sure it’s a strong, profitable type of company, and an industry that will function in the long-term.
If it’s an industry we think that the internet will replace, we don’t show those properties. If it’s a company we don’t like their standing, we don’t show those properties. If it’s a franchisee, we wanna make sure it’s a quality franchisee – many locations, and stable within their financials.
Joe Fairless: What are some ways you quantify that qualification process with strength of tenants?
Alan Fruitman: Many of the companies are publicly-traded, so we look at their earnings ratios, their stock performance, their 52-week trends. That’s number one. If it’s a franchise, over 26 years I’ve sold so many properties that I recognize the franchisees from other properties my clients have purchased. I stay in close contact with my clients through the years. If there’s a problem, they usually call me right away, so I know which tenants have had a track record of stability and which ones have not.
I’m not perfect, so when there’s a new tenant, there’s a learning curve that has to happen… But because I’ve sold so many properties over such a long duration of time, I can usually weed out the problem properties well in advance of my clients ever seeing them.
Joe Fairless: You said most are publicly traded companies… What are a couple examples — or maybe tell us a story of a deal that was not a publicly-traded company, but still passed your test.
Alan Fruitman: Many years ago I sold a Burger King in Ohio, and when the lease came due, the tenant did not renew… So my client called me and said “Alan, what do we do? Burger King is not renewing.” I connected the client with a leasing broker in the local market, and because the location was so strong, within less than one month we had a bidding war between Chipotle and Starbucks to take over that soon-to-be-vacant Burger King. And the end result was Starbucks winning the bidding war, and we went from a franchised Burger King to a corporate Starbucks, which has certainly a higher credit rating, and the rents went up significantly, too.
That’s why our first criteria is location. And if our current tenant were to vacate, we wanna make sure the future is greater than the present.
Joe Fairless: And then length of lease… Do you have any investors who say “Alan, I do want something that is passive, but I see this area is growing, and I think the shortest lease possible would be best, because then we can get them real good on the increase once the area comes to where I think it will be.”
Alan Fruitman: That’s a great question… There is a segment of the market, and a very valid and valuable segment of the market that looks for that type of investment. It’s outside of my scope. We focus on the longer-term lease properties, but that’s a great angle within the triple net property world that investors purchase. It’s just outside of my scope. I have a very tight vision for what I sell. There’s an incredible demand. There’s lots of opportunities for these long-term lease properties. This is typically what the buyers seek, which is why it’s my focus. But the angle you described is a great angle, and it’s just outside of the box of what I focus on.
To take that thought one step further, my clients sometimes call me when their lease becomes short, and they ask me what to do, and 19 times out of 20 I’ll tell them “Don’t sell. Because if you sell, somebody else will pick up on that opportunity, that great location, the long-term vision that you have, and they’ll take your upside.” So when the lease gets short, if the location is excellent, I advise my clients not to sell, and not give somebody else that opportunity that you just asked about.
Joe Fairless: How do you define a longer-term lease?
Alan Fruitman: In the triple net lease world, leases usually are between 10 and 25 years, and that’ll be the primary lease term before the option periods.
Joe Fairless: Tell us a story of a deal that was a triple net, but did not work out.
Alan Fruitman: There’s probably many. You probably don’t believe me when I tell you I don’t have an example of any of my clients that it happened to… I’ll tell you another story. The first property I ever sold was a Denny’s in Colorado. It was near the outlet stores of Interstate 70. Very prominent location, but I guess it didn’t work out. The tenant was a small franchisee; there was a personal guarantee associated with the lease.
The tenant closed their shop, because the franchisee had (we’ll say) other problems, without getting into a long story. The personal guarantee held up. The client received all of their rent. The client worked a buyout with the tenant, and was given a significant amount of money as that lease ended… And the property is now turned into a Chipotle and a Which Wich sandwich shop. It’s probably tripled in value over this long duration of time.
I don’t have an example of difficult endings… One thing I would share is if you don’t have a great location, when your tenant vacates, that’s where you could get in trouble. If you know that McDonald’s, or Burger King, or Dollar General, or any tenant in a rural area, the current tenant might thrive because they might dominate a small market which fits their model, but that’s the current use. The problem arises when they vacate – what do you do with that vacant building in a very small marketplace? That’s where clients could get in trouble.
Joe Fairless: Based on your experience, what type of returns should an investor expect on a triple net?
Alan Fruitman: The conservative McDonald’s, Chick-fil-A type investment with a new 20-year triple net lease will be around a 4% cap. The franchise restaurants would be somewhere in the mid-fives, or approaching 6% cap rate, and everything in between. So 4% to 6% is the range for most newer, longer-leased, triple net properties.
Joe Fairless: Okay. And what’s an example of something that is outside of that 4% to 6% range?
Alan Fruitman: As the location gets more inferior — again, we have these three criteria… We have location, strength of tenant, length of lease. When one or some combination of those three are not optimal, the cap rate rises. When all three are optimal, the cap rate is low, and when there’s a fine balance between those three, you’re in the mid range.
If your location is not very strong, the cap rate rises. If it’s a weaker tenant, the cap rate rises. A shorter lease, the cap rate rises, too. So when you get all three of those criteria that are not optimal, that’s when you’d have the highest of cap rates.
Joe Fairless: What’s the highest cap rate you can think of on a deal you’ve done? Triple net deal.
Alan Fruitman: Again, I only focus on the quality properties, so not much higher than a 7% cap. Maybe an 8% cap, but that was a long time ago. As the market has gotten better and better each year, as we’ve gotten further away from the recessionary times of a decade ago, cap rates on everything, on all types of real estate were higher. But in this marketplace, not much more than a 6% cap, in the last several years.
Joe Fairless: Okay, so over the last several years what was the property – can you just tell us the property that was the highest cap rate, and just describe it a little bit?
Alan Fruitman: Without researching, the first one that comes to mind was a Zaxby’s franchise guaranteed, kind of a B- location, and that was about a year ago. The cap rate was around 6.5%.
Joe Fairless: Based on your experience, what’s your best real estate investing advice ever?
Alan Fruitman: My clients always ask me — on my e-mail list there’s around 200 properties, and my clients frequently say “Alan, what’s the best property on your list?” And my answer is always the same – it’s the one in the best location. I’d rather have a franchised Burger King in an excellent location than a corporate McDonald’s in an average location. So the answer to your question is the best property is the one in the best location.
Joe Fairless: And you mentioned earlier how you’re defining the best location – that it will thrive and be easily re-tenanted, and it’s in a retail corridor… What are some other quantifiable things we could look at to say “Yup, this property out of the other 199 is head and shoulders in the best location”?
Alan Fruitman: Well, other quantifiable measures would be traffic counts, demographic, population counts, income levels… Those are other quantifiable. You can also look at market cap rate for tenants. Many of these tenants — McDonald’s is a… I don’t know the number, but it’s a well over 50 billion dollar company. And Chase Bank… You can look at Standard & Poor’s credit ratings; that’s another quantifiable measurement of worthiness, credit-wise.
Joe Fairless: And when you take a look at the location from a traffic count, retail corridor, population, income levels, market cap rate, how do you determine which of those are more important than others?
Alan Fruitman: That’s a great question. There’s not one way to answer your question. There’s many measurements. Let’s look at demographics. You can have several hundred thousand people on a five-mile radius, but if you’re half a block apart, it’s a completely different area. If you’re on the signalized traffic corner or if you’re on a side street a half block away, the value of the property might be one-tenth as valuable.
So there’s an exception to every rule, and you have to take location, demographics, retail corridors, strength of tenant – you take all these attributes and figure out what makes each property unique. And there’s no two equal properties. Sometimes you have to make value judgments of which criteria to make more valuable than the other. Do you look at being on the corner more important than being sandwiched between on an outparcel to a Home Depot or Safeway or Walmart anchored center?
There’s so many great choices. Sometimes you have to make a value judgment of which ones you think will be the greatest long-term. Sometimes you say “I’ll take a good tenant, not a great tenant, but a home run A+ location.” That might be a value judgment. And maybe you get a little higher cap rate because it’s a strong B tenant, but not an A, but you made up for it with the security that incredible location will bring to you.
Joe Fairless: Very helpful, thank you for that additional perspective on how to determine how to think about assessing opportunities, and in particular locations. We’re gonna do a lightning round now. Are you ready for the best ever lightning round?
Alan Fruitman: I’m ready.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve recently read?
Alan Fruitman: I’ve read a book — I think it was called The Two Page Marketing Plan. I read it over the holidays… And it really helped me dig into what I’m doing, how I’m doing and how I can improve it.
Joe Fairless: Best ever deal you’ve been a part of?
Alan Fruitman: I don’t know the answer to that question. I close 30-50 properties every year. The one that my client loved the most… I’m blessed with so many clients that buy so many great properties. When my client is thrilled at the end of the deal, that’s the best deal.
Joe Fairless: What’s a mistake you’ve made on a transaction?
Alan Fruitman: Good question. I’m not sure off the top of my head the best answer to your question… I think if I had to make sure I do consistently one thing in every deal it’s ask questions and just let my clients talk, and answer their questions, and let them ramble and tell me what’s important to them, and just listen, listen, listen, before I advise.
Joe Fairless: Best ever way you like to give back to the community?
Alan Fruitman: My mom has run a Thanksgiving charity project since I was probably 8 years old. I was born and raised in Florida, I live in Colorado now, and for 40+ years I’ve been blessed to be part of this Thanksgiving charity project that has zero financial overhead, and we’ve fed many thousands of families, and continue to do so.
Joe Fairless: How can the Best Ever listeners learn more about your business and what you’re doing?
Alan Fruitman: Two ways. Number one, my website, 1031tax.com. And on my website you can sign up for my property list. That’s only for investors, not for brokers. And number two, I wrote The Triple Net Property book, and if you’re an investor looking to buy triple net property, you can call me at 800-454-0015, or contact me through my website and I’ll mail you a hard copy of my book.
Joe Fairless: Alan, thank you so much for being on the show, talking about triple net, and the reason why you are laser-focused on helping your clients get triple net properties, and how to evaluate triple net properties, the type of returns to expect, 4%-6% generally, and in terms of how to assess the opportunity – 1) location, 2) strength of tenant, and 3) length of lease. Then you went into detail for how to think about each of those three categories, and in particular location.
Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Alan Fruitman: Thank you, Joe.