Opportunity Zone Drives Net Lease Sale

The Challenge

A private investor recently worked with Stan Johnson Company to purchase a single-tenant net lease property in a 1031 exchange. The investor was interested in finding an exchange asset located in an Opportunity Zone in Redding, California – the county seat of Shasta County located in the north of the state.

The Opportunity Zone program, a creation of the Tax Cuts and Jobs Act of December 2017, presents new benefits for investors of single-tenant net lease properties. Opportunity Zones are found in economically challenged communities where new investments, under certain conditions, may be eligible for preferential tax treatment including the deferral or forgiveness of capital gains tax. These areas have been identified specifically to encourage investment and development to support growth.

The private investor, driven by his 1031 exchange timeline, needed to identify a purchase property quickly. Given the specific criteria he was looking for, the investor recognized the need to work with a qualified and experienced advisor who could ensure the down-leg of his exchange would close without issue.

The Solution

The prime candidate for this private investor’s exchange transaction was a retail property listed on behalf of the seller by Stan Johnson Company’s Marc Barber. The property was occupied by investment-grade tenant Dollar Tree on a long-term lease.

As Mr. Barber began working with the interested investor, the buyer specified certain criteria, in addition to being located in an Opportunity Zone. The store needed to report sales in excess of $2 million per year, and it must be located in a community of more than 75,000 people within a 5-mile radius.

The desirable combination of demographics, store sales, strength and recognizability of the tenant, and its location in an Opportunity Zone made this Dollar Tree asset the perfect exchange property for the buyer. He worked quickly with Mr. Barber to make an offer and was guided step-by-step through the due diligence process.

The Outcome

Despite the challenges that arose, including having to resolve a CAM reconciliation dispute with Dollar Tree, the buyer communicated on several occasions that he was committed to the deal. He was willing to pay a premium price for this property, and endure the delays and Rechallenges, partly because of the tenant’s creditworthiness and partly because buying in an Opportunity Zone would allow him to defer or eliminate capital gains taxes following a 10-year hold period.

The idea behind the creation of these zones was to stimulate investment in low-income areas. As the new owner of an existing property within a zone, the private investor may realize tax benefits related to the purchase of his Dollar Tree, in addition to seeing other developers and investors take advantage of opportunities in the community. Local economic growth coupled with new real estate development in the area could result in the increased value of the Dollar Tree property over time, ensuring a successful investment for the buyer.

While the transaction closed six weeks past the original closing date, it sold at the second lowest cap rate for a dollar store in Northern California in 2018, and at 98 percent of the original list price. This sale allowed Mr. Barber to deliver remarkable results – not only for the seller of the Dollar Tree, but for the private investor who relied on the experience and advice of a seasoned real estate professional to help him navigate a challenging real estate market.