CASE: BUILD$-$TO$-$SUIT

Over the past $7$ years you have developed $12$ build$-$to$-$suit facilities for "Convenient Marts." These

facilities are generally located on strip center outparcels, are roughly $11,000$ SF$,$ and completely occupied

by a Convenient Marts store. These properties have all been located along the main thoroughfares of

suburban Philadelphia.

The typical lease terms on these deals have been:

A $10-$year lease term

Rent is triple net $($NNN$")$

Rent has provided roughly a $350-$basis point spread over the $10-$year Treasury rate when the deal

was signed

A $10-$year renewal option

Convenient Marts may purchase the property $($Convenient Marts has the option$)$ at any time for

"fair market value"

Convenient Marts may purchase the property in year $10($and year $20$ if lease option is renewed$)$

at a $10\%$ discount to "fair market value"

Convenient Marts has a right of first refusal $("$ROFR$")$ with respect to both lease and purchase as$.$

long as the lease is in effect.

The typical Convenient Marts store is a plain "box," and petroleum product sales are prohibited in the

leases.

Over the past decade Convenient Marts has expanded in the suburban areas of the major mid$-$Atlantic

state metropolitan areas. This publicly$-$traded company has been rated BBB$+($or better$)$ for the past $7$

years.

Convenient Marts has recently embarked upon an aggressive expansion campaign, targeting the suburban

areas of secondary mid$-$Atlantic cities for new stores. As a result of this expansion effort, S&P has placed

Convenient Mart's debt on a "credit watch," expressing concern that this effort may result in lower quality

cash flows and an increased debt burden.

You have sold $10$ of the $12$ Convenient Mart stores you developed. In each case, you sold them within $18$

months of completion for an average cap rate that has a spread over the $10-$year Treasury of about $210$

basis points. The two properties you have not sold have been completed within the past $12$ months. You

anticipate that these properties will each sell for a spread of about $200$ basis points over the $10-$year

Treasury during the next year. Currently, the $10-$year Treasury rate is $4\mathrm{.}25\%.$

Development of a Convenient Mart requires $10-16$ months to complete. Typically, it requires about $12$

months to develop.

Convenient Marts has approached you and asked you to play a major development role in their expansion

effort. Specifically, they have indicated that they would like you to develop stores for them in theAllentown $/$ Bethlehem, Pennsylvania area. They plan to add about $10$ stores in this region over the next

$3-4$ years and want you to be their developer in this effort.

Their first store site in this market is along the main suburban throughway in suburban Allentown. It is

for a $10,000-$SF store, with appropriate parking, ingress$/$egress$,$ and signage requirements. Convenient

Mart's real estate committee has approved the following non$-$negotiable $($take it or walk$)$ deal terms:

$10-$year lease

$10-$year renewal option

Option to purchase at any time at "fair market value"

Option to purchase in year $10($and year $20$ if lease in renewed$)$ at $10\%$ discount to "fair market

value"

Right of first refusal with respect to both lease and purchase as long as the lease is in effect

Triple net rent lease

Rent for the first $10$ years is $$50,000$ annually

Rent during the option years would be $$65,000$ annually

Certificate of Occupancy must be in place within $13$ months

If the Certificate of Occupancy is not in place within $13$ months, rent during the first $10$ years is

reduced to $$40,000$ annually

If Certificate of Occupancy is not in place within $14$ months, Convenient Marts is released from

the lease and you must pay them a penalty of $$60,000.$

This project would represent your first effort outside of the Philadelphia area. You believe that you can

acquire the site for $$120,000.$ You believe that approval, planning, and design costs should run about

$$50,000,$ while hard construction costs are estimated at roughly $$400,000.$

You have a term sheet on a loan which provides $3-$year financing of $$440,000$ at LIBOR plus $300$ basis

points. $3-$Month LIBOR is currently $1\mathrm{.}46\%($a cyclical low$).$ The loan adjusts the interest rate quarterly.

The loan has no amortization and is pre$-$payable without penalty. You also will receive a development fee

of $5\%$ of hard costs plus approval, planning, and design soft costs.

Initial discussions with your lender and local planning officials lead you to anticipate no unusual problems

with the project. The equity required for this project is available but would absorb about $30\%$ of your

equity capacity.

Sh