Case Study #13 – “BioMedica” Chain Drugstore – Build-to-Suit Investment in Colombia (Case Only)
In this triple net lease case study, we explore a real-world scenario involving the development of a build-to-suit commercial property for a leading drugstore chain in Colombia. By examining this scenario, you will gain hands-on experience analyzing a triple net lease (NNN) structure, a common type of lease in commercial real estate, where tenants are responsible for property expenses. The project involves the acquisition of land in a strategic location and the construction of a property tailored to meet the tenant’s operational needs, providing a strong example of a development-focused NNN deal.
Practice makes perfect! This is a real scenario based on actual properties and situations. Names and locations have been changed for confidentiality reasons, but the fundamentals are real-to-life.
Each case study shared in this series mirrors real world situations, either in terms of the types of deals you will look at in various roles or the types of modeling tests you’ll be required to perform as part of the interview process. You can browse this and other case studies in the A.CRE Library of Real Estate Case Studies.
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Background
You are a recent graduate of the University of Central Florida (UCF) with a degree in Business Administration, specializing in Real Estate. While studying in Florida, you developed a keen interest in international real estate markets, particularly in Latin America. This interest was fueled by your family ties to Colombia, where you spent many summers visiting relatives and witnessing firsthand the rapid urbanization and growth in cities like Bogotá and its surrounding areas.
Upon graduating from UCF, you worked in the banking sector in the U.S., gaining valuable experience in financial analysis and investment strategies. However, your passion for real estate led you to join a small real estate investment LLC, where you quickly advanced to a role that involved overseeing financial modeling for various projects. During this time, you took the A.CRE Real Estate Financial Modeling Accelerator course, becoming an expert in the field.
Now, leveraging your professional experience and deep understanding of both the U.S. and Colombian markets, you are ready to embark on your first real estate investment promotion in Colombia, in a region you know well from your family connections and regular visits. This project involves developing a build-to-suit commercial property for lease to a major drugstore chain that is expanding rapidly in Colombia and beyond.
Time to Make Your Mark
After years of sharping your skills and building a reputation in real estate financial modeling, you’re ready to step into the spotlight as a real estate promoter. With a wealth of experience behind you and a deep connection to the Colombian market, you’re determined to find an investment that promises long-term, stable returns—one that can serve as the cornerstone of your new venture.
As you begin your search, you reconnect with brokers who specialize in retail real estate in Colombia. It’s not long before a former colleague reaches out with an intriguing opportunity—a land development project in Chía, Cundinamarca, tailored for a major pharmacy chain, BioMedica. The project in question has a strategic location since the roads around the lot are being widened, which will generate more vehicular traffic, and strong tenant appeal catch your attention immediately. Sensing the potential, you decide to dive deeper, conducting a thorough financial analysis to determine if this could be the flagship investment that sets your path to success.
The Opportunity
The project involves acquiring a prime piece of land in Chía, Cundinamarca, and constructing a build-to-suit commercial property specifically tailored to the needs of a leading drugstore chain. The drugstore has a strong brand presence and is expanding aggressively in the region, making this a highly attractive tenant.
This project is particularly compelling due to its tailored design to meet the specific needs of the Drugstore, our tenant demands include a space with parking space, close roadways and drive through, to ensure optimal operational efficiency and customer accessibility. However, the financial dynamics of this investment require careful consideration. For example, while the lease agreement offers a rental increase rate throughout the base term and renewal options to hedge against inflation (IPC).
To make an informed decision, it’s crucial to model the projected financial performance of this development and determine if its long-term economics align with your new firm investment strategy.
NNN Case Study – “BioMedica” Chain Drugstore
Main Assumptions
Property Description
- Address: Calle 2 #12-24 Chía, Cundinamarca – Colombia.
- GLA: 34,400 SF
- Land Area: 34,444 SF
- Constructed Area: 6,300 SF
- Replacement Cost (including land value): $45/SF
- Land value: $18/SF
- Year of construction: 2024
- Lease term agreement: 15 years
- Option: 5-year option renewal.
- Rental increases: Colombian IPC (consumer Price index) Linked
- Lease type: Triple Net Lease (NNN) – The landlord will provide a detailed breakdown of these costs annually, and the tenant will reimburse the landlord for these expenses monthly.
Financial Assumptions
- Land Cost: 620,000 USD
- Closing Costs: 4.5%
- Development Cost: 843,566 USD
- Approved Lease: 14,355 USD
Timing
- License: Months 1-3
- Land Purchase: Month 4
- Development: Months 5-10
Operating Expenses:
- Property management: 7%
- Fiduciary administration and payments: 600 USD/Month
- Real estate taxes: 1,946 USD/Year
- Accounting: 500 USD/Month
- Capital Reserves: 0.5% on the value of the construction, reserving proportionally each month.
General Investment Assumptions
- 10-year analysis period
- All-cash purchase (i.e. no financing)
- All operating expenses are paid by the tenant
- No capital expenditures over the hold period
- Initial cap rate based on https://latamcaprates.colliers.com/
- Reversion cap rate is 50 bps above the acquisition cap rate
- Selling costs 100 bps less that the selling price
- Market Rent on lease agreement: $2.40/SF, growing by IPC.
The Task
Use the A.CRE “STNL (Single Tenant Net Lease) Valuation Model” to underwrite this build-to-suit single-tenant net lease (STNL) project. This model is specifically designed for single-tenant, net lease properties and includes features that allow you to underwrite development projects from acquisition through stabilization and disposition.
Answer the Following Questions for the BioMedica Project.
- Is the development cost per SF above or below replacement cost and by how much?
- What is the average free and clear return over the 10-yr hold period?
- What is the IRR over the hold period?
- What is the unlevered equity multiple based on the projected cash flows over the 10-year hold period, and how does this metric align with your investment criteria?
Conceptual Questions
- Evaluate the impact of the lease structure, including rent escalation clauses, on the net present value (NPV) of the investment. How does this influence the overall IRR?
- How does the location’s projected growth and vehicle traffic impact the investment’s potential for long-term success?
Extra Credit
- Partnership Model: Assume you bring in a local investor to contribute 95% of the required equity while your share it’s the remaining 5%. Propose a waterfall structure where the investor receives a preferred return of 9% on their equity contribution, followed by a pari-passu split of remaining cash flows. Calculate the IRR and equity multiple for both you and the investor.
- Sensitivity Analysis: Conduct a sensitivity analysis to show how changes in key assumptions, such as cap rates, rent escalations, and vacancy rates, impact the overall return metrics.
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Frequently Asked Questions about the BioMedica Chain Drugstore Build-to-Suit Investment Case Study
What type of lease is used in this case study?
This case study involves a Triple Net Lease (NNN) where the tenant reimburses the landlord for property expenses, including taxes, insurance, and maintenance. The lease also includes IPC-linked rental increases and a 5-year renewal option.
Where is the BioMedica project located?
The project is located in Chía, Cundinamarca, Colombia at Calle 2 #12-24, a strategic area expected to benefit from road expansion and increased vehicular traffic.
What are the main development and financial assumptions?
Land cost: $620,000
Closing costs: 4.5%
Development cost: $843,566
Approved lease rate: $14,355/month
Lease term: 15 years with 5-year option
Rental escalation: Linked to IPC
All-cash purchase; no financing used
What model should be used to underwrite this case?
The case should be underwritten using the A.CRE STNL Valuation Model, specifically designed for single-tenant net lease development and investment scenarios.
What types of return metrics should be calculated?
You are asked to calculate the:
Development cost per SF vs. replacement cost
Average free and clear return
Unlevered IRR
Equity multiple over a 10-year hold period
How does the lease structure impact the NPV and IRR?
The triple net lease with IPC-linked increases ensures predictable and growing cash flows, enhancing both NPV and IRR by hedging inflation and minimizing landlord expense risk.
Why is location an important consideration in this case?
The property’s location in Chía, a growing area with planned infrastructure improvements, enhances its long-term potential, tenant retention, and appeal to future buyers.
What assumptions are required for the extra credit partnership model?
Assume:
Investor contributes 95%, you contribute 5%
Investor receives a 9% preferred return
Remaining cash flows split pari-passu
You’ll then calculate IRRs and equity multiples for both parties based on the waterfall structure.
What does the sensitivity analysis aim to explore?
The sensitivity analysis tests how changes in cap rates, rent escalation, and vacancy rates impact return metrics like IRR and equity multiple, helping evaluate investment risk.
