This document provides a summary of the third quarter 2009 issue of Net Lease Advisor. It includes articles on the benefits of building "green" properties and taking advantage of 15-year depreciation for restaurant buildings. It also discusses the current state of the net lease market and an interview providing details on involuntary conversions under Section 1033 of the tax code.

1. NET LEASE ADVISOR
YOUR SOURCE FOR INVESTMENT REAL ESTATE™
Third Quarter 2009
Q&A:
Q& A: BENEFITS OF
BUILDING “GREEN”
S MOLEN P LEVY 15 Year Depreciation,
“I’m Lovin’ It”
Involuntary Conversions
What Is Defeasance?
Where is the
Market Today?
TE NANT
S P OTLIGH T:
PO TL I G HT :
COMPANIES, INC.

2. Q&A:
Q& A:
SECTION 1033 - INVOLUNTARY CONVERSIONS
Q&A with S MOLEN P LEVY ’ S Dan Ruttenberg & Matt J. Campione
C
alkain asked Dan Rutten- is eminent domain. That is when erty must be “similar or related
berg and Matt Campione the government takes your prop- in service or use”. For example,
from S MOLEN P LEVY in Vienna, erty for its own purposes such as your house should be replaced by
VA to explain §1033 involuntary building a new road. In exchange another house, although you could
conversions as it applies to real for your property, the government purchase raw land subject to a
estate. Founded in 1977, S MOLEN - gives you the fair market value of construction contract. This is gen-
P LEVY (smolenplevy.com) provides your real estate and you would erally not an issue as would usually
high quality legal representation typically have to pay capital gains replace your house with another
to individuals, families and busi- on the transaction as if you vol- home.
nesses. Mr. Campione served for untarily sold it to any third party.
many years as a Senior Tax Law However, an involuntary conver- CALKAIN: Why wouldn’t I just do
Specialist in the National Office of sion also includes a sale of prop- a §1031 Like-Kind Exchange if my
the Internal Revenue Service and erty under the threat of condem- real estate is involuntarily con-
as a tax partner in Reznick, Fedder nation as well as the destruction of verted?
and Silverman (currently known as property from fire, flood, etc.
the Reznick Group) before joining S MOLEN P LEVY : First of all, a §1031
S MOLEN P LEVY in 2001. Mr. Rutten- CALKAIN: Are there any restric- Like-Kind Exchange only applies to
berg joined S MOLEN P LEVY in 1997. tions on the replacement property property used in a trade or busi-
In addition to his law degree, Mr. one can buy? ness or held for investment pur-
Ruttenberg has a Master of Laws in poses. Therefore, you cannot take
Taxation and is licensed as a Certi- S MOLEN P LEVY : Most of the time, we advantage of §1031 if your home
fied Public Accountant. are dealing with property that is is involuntarily converted. Second,
condemned or sold under threat of the rules under §1033 are much
CALKAIN: What is a §1033 Invol- condemnation. Such involuntarily more flexible than the rules under
untary Conversion Exchange with converted real property may be §1031. For example, the sales pro-
regard to real estate? replaced by real property which ceeds in a §1031 Exchange must be
is “like-kind” in nature. Like-kind held by a Qualified Intermediary
S MOLEN P LEVY : Internal Revenue property is a fairly broad stan- such as the ES Group until they are
Code Section 1033 allows taxpay- dard. For example, an apartment used to purchase the replacement
ers to defer the capital gains asso- is like-kind to a farm and improved property. However, the property
ciated with real property that has property is like-kind to raw land. owner can hold their own funds
been involuntarily converted when However, if other property is in a §1033 Involuntary Conversion
they purchase similar replacement involuntarily converted, you are Exchange. Also, when dealing with
real property. If you are familiar subject to a stricter standard. In property that is used in a trade or
with a §1031 Like-Kind Exchange, it such a case, the replacement prop- business or held for investment
works similarly.
CALKAIN: What is considered an I N VO L U N TA RY C O N V E R S I O N
“involuntary conversion” for pur- Definition – noun: Money or property received in compensation for a dam-
poses of a §1033 Exchange? age or loss by casualty, condemnation, or theft. Profit realized on involuntary
S MOLEN P LEVY : The most commonly conversion is generally tax-free if it is invested in a property similar to the
thought of involuntary conversion damaged or lost one within a certain period.
CALKAIN COMPANIES, INC. NET LEASE ADVISOR Third Quarter 2009

3. purposes, the taxpayer has 3 years
to purchase the replacement prop-
15 Year Depreciation,
erty instead of the 180 days one
would have in a §1031 Like-Kind
Exchange.
CALKAIN: What are the common
pitfalls in this area for taxpayers
subject to this provision?
“I’m Lovin’ It”
By: Winston Orzechowski
S MOLEN P LEVY : You have to be care-
ful to preserve the identity of the
party eligible for the tax free roll
A
over of proceeds. These rules are
similar to rules regarding which mid the hundreds of pages much a depreciation shield increase
party is eligible for §1031 Like- contained within the Emer- of close to 40% could affect one’s
Kind Exchange treatment. For gency Economic Stabilization cash flow. For purposes of the com-
example, if real property held by a Act of 2008, there potentially exists parison, we will be using a McDon-
partnership is taken or sold under an extremely valuable tool for those ald’s and a Burger King, both with
threat of condemnation it is the interested in real estate investment. solid credit ratings, placed in service
partnership that must purchase the A new law enables restaurant build- in 2009 and 2007 respectively. Since
replacement property within the ings and improvements to be depre- the McDonald’s was placed in service
time period allowed. The partners ciated on a 15 year basis if they are in 2009 it can take advantage of the
cannot individually reinvest the placed in service within the calendar accelerated depreciation schedule,
proceeds. A recent private letter year of 2009 and more than 50% of unlike the Burger King.
ruling, PLR 200921009, provides their square footage is dedicated to
an interesting example of how the “the preparation of, and seating for What is evident from this example
eligibility can be fractured through on-site consumption of, prepared is that restaurant real estate is the
a creative use of partnership taxa- meals”. What does this mean for the place to invest in 2009. In this case
tion rules. Similar to a §1031 Like- investor? Well, restaurant real estate we saw an after tax cash flow differ-
Kind Exchange, the taxpayer has to generally has to be depreciated on ence of $55,671 in favor of McDon-
be careful to buy enough replace- a 39 year basis, which means one alds for one year. If all else holds
ment property to avoid recognition could increase their depreciation equal, over 15 years that becomes an
of income. §1033 is fairly technical tax shield by close to 40% if they $835,065 difference. This could make
and has many rules. The bottom act within 2009. That translates into a huge difference to all who are
line is that this is not something large dollar sign increases on after thinking of investing in 2009 and goes
someone should try without the tax income. to show that change on Capital Hill
guidance of qualified professionals. can turn into cash in your pockets.
Below is an illustration of just how
Along with handling §1033 Invol-
untary Conversion Exchanges and
other real estate matters, Smolen-
Plevy is a respected leader in the
areas of succession planning for
businesses, general corporate law,
estate planning, estate administra-
tion and family law. BURGER KING MCDONALD’S
F O R M O R E I N F O R M AT I O N :
Value (Improvements) $4,045,250 $4,045,250
Daniel H. Ruttenberg
dhruttenberg@smolenplevy.com Value (Equipment) $2,206,500 $2,206,500
Depreciation Life (Improvements) 39 Years 15 Years
Matthew J. Campione
mjcampione@smolenplevy.com Rental Income $460,000 $460,000
Interest-1st Mortgage $297,579 $297,579
S MOLEN P LEVY
Depreciation (Improvements) $99,392 $258,451
8045 Leesburg Pike,
Fifth Floor Depreciation (Equipment) $382,460 $382,460
Vienna, VA 22182 Fees/Costs $1,000 $1,000
Phone: 703 790 1900
Fax: 703 790 1754 Taxable Income ($320,431) ($479,490)
www.smolenplevy.com Tax Liability Savings (35%) ($112,151) ($167,821)
CALKAIN COMPANIES, INC. NET LEASE ADVISOR Third Quarter 2009

4. ger leases, the best real estate and
an absolute triple net lease. But
what they may be forgetting is that
net lease investments offer some-
thing that other real estate doesn’t;
the opportunity to underwrite the
known investment potential from
day one. There is no other type
of commercial real estate that will
allow an investor to know exactly
what their income will be from the
day they buy the asset until the day
they sell the asset. But the percep-
tion is that they should be getting
a much better return than they are
being offered. In some cases, that
is highly warranted. But in others,
it may not be.
We have to remember that net
lease investments are still a long
term income stream backed by real
estate. When an investor and I dis-
cuss the current market statistics,
I always remind them that yes, they
will be getting a better return than
what was offered in the last 3-4
years, but they may not be getting
the deal of a lifetime. Net lease in-
vestments are still garnering single
digit cap rates for long term, credit
tenant investments. There was a
Where is the
day when today’s investments were
pricing out at 10%+ CAP rates, but
not today.
Today, we see genuine interest in
Market Today? the net lease investment asset class
because of its passive nature and
higher returns than money mar-
kets, cd’s, US treasuries, and the
By: Jonathan W. Hipp like. So while the perception of
the market is “buy now, because it
may not be this good again,” I offer
the following advice. The net lease
market will ebb and flow with the
T
here is no doubt that we net lease brokerage firm, we have rest of the market, but stability
have seen drastic adjust- the privilege of working with of the assets will typically remain
ments in the net lease professionals from a multitude of somewhat constant. Net leases are
market. Not only from the finan- disciplines within commercial real almost an anomaly in that respect.
cial and economic perspectives, estate. We hear market perspec- Perception is reality, but net lease
but from a psychological perspec- tive from attorneys to engineers, investments are real.
tive as well. Of course there has developers to sellers, REITs to in-
been quantifiable increases in cap vestors and everything in between.
rates, interest rates and internal What we are hearing is everyone F O R M O R E I N F O R M AT I O N :
rates of return, but the perception wants more for less. That doesn’t Jonathan W. Hipp
of today’s market is probably the mean that they are getting it, but Calkain Companies, Inc.
11150 Sunset Hills Drive
most interesting intangible invest- at least they are saying that they Suite #300
ment factor. want it. Reston, VA 20190
Tel: (703) 787-4714
As the President and CEO of a Investors want better credit, lon- jhipp@calkain.com
CALKAIN COMPANIES, INC. NET LEASE ADVISOR Third Quarter 2009

5. T
he much anticipated green
building movement has finally
reached the commercial real
estate industry, where it has the
potential to make the largest posi-
BENEFITS OF
tive impact on the environmental
health of our planet. The shift to
constructing and occupying green
BUILDING “GREEN”
buildings has been challenging due
to the adjustment in conventional By: Joan Pino
practices required by professionals
in the industry coupled with wide-
spread speculation regarding the
“green cost premium.” Progressive
companies including Whole Foods
Markets, Chipotle Mexican Grill,
Best Buy, Starbucks, Walgreens,
PNC Bank and Toyota, in addition
to governments across the world,
have tackled these initial obstacles
and proved time and time again
that green buildings are cost-ef-
fective investments that provide
numerous advantageous benefits
for all who develop, own and oc-
cupy them. While everyone stands
to profit, net lease tenants have
the potential to gain the most from
green buildings, which provide pro-
tection from rising energy costs,
boost employee productivity, drive
higher sales and contribute to the
overall consumer experience.
A study released by CoStar Group
in March 2008 stated “non-green
buildings are going to become
obsolete.” This statement may
seem exaggerated and impracti-
cable, yet it is an ever impending
truth which the commercial real
estate industry must consider. Lee Arnold, CEO of Colliers Arnold, tween time and money spent by
said in a recent interview on Tampa consumers in stores with increased
Bay’s Studio 10 daytime talk show levels of natural light, which is a
“you will not see commercial key design element in many green
office buildings that are competi- buildings. All of these benefits
tive in the future if they are not supply developers and owners of
green, it will impact their cap rates green buildings with highly market-
and value.” Net lease tenants are able assets which create a distinct
becoming aware of and beginning competitive advantage over con-
to demand the ample tangible and ventional buildings in comparable
intangible benefits green buildings markets.
offer. Green buildings reduce en-
ergy use by 24-50%, water use by The U.S. Green Building Coun-
“The LEED® ( Leadership in Energy and 40%, and solid waste by 70% which cil (USGBC) formed the LEED®
Environmental Design) Green Building
Rating System is the nationally accepted all equate to decreased operating (Leadership in Energy and Envi-
benchmark for the design, construction, and costs. Furthermore, they have been ronmental Design) Green Build-
operation of high performance green build- proven to be healthier and safer ing Rating System with the goal
ings.”
“ ‘LEED’ and related logo is a trademark for occupants and enhance public of providing a comprehensive
owned by the U.S. Green Building Council image. Research has also shown a method for designing, constructing,
and is used by permission.” strong positive correlation be- and operating high performance,
...Continued on page 8
CALKAIN COMPANIES, INC. NET LEASE ADVISOR Third Quarter 2009

6. TENANT SPOTLIGH T:
SPOTLIGHT:
Buffalo Wild Wings
ligation, Buffalo Wild
Wings’ fixed cover-
age (the firm can pay
all fixed charges) is
Snapshot By Apeksha S. Shah considerably high
and the lease rent
is only 6.5% of the
revenues, indicating
a strong investment
B
uffalo Wild Wings, Inc., (NAS- not compromising its earnings and grade level. Also,
DAQ: BWLD) founded in revenue growth goals. the company recorded revenues of
1982 and headquartered in $2 million per store last year.
Minneapolis, Minnesota, is a grow- Buffalo Wild Wings’ management
ing owner, operator and franchisor continues to target impressive dou- Buffalo Wild Wings will open its first
of restaurants serving Buffalo-style ble-digit earnings growth rates and location outside the United States
chicken wings. Buffalo Wild Wings has also generated returns greater within three years and is looking
has escaped the fate of most casual than the cost of equity, hence creat- for sites in Canada and Mexico,
dining chains during this economic ing value for shareholders. said CEO Sally Smith, according to
downturn and its revenue has grown Bloomberg News. Projecting the
at least 19 percent every year for Financially, the company has gener- company’s future cash flows, we can
the past four years. Last year the ated positive cash flow from opera- document that the company will
company recorded revenues of $422 tions of $66 million, and is free increase its growth by capturing
million, which Value Line forecasts to of long-term debts. But it has the US market and expanding
grow to $1 billion by the year 2014. a substantial amount of abroad, hence will continue
operating leases in its off to create value. Also Buf-
The company owns 197 stores and balance sheet financing. falo Wild Wings retains
has 363 franchises. From the 2008 The lease amount is financial flexibility
annual report, the company seeks to not reflected on the (since it is an all eq-
grow to 1,000 outlets as it expands company’s financial uity company and has
nationally. Despite the recent eco- statements. If the operating leases the capacity to take
nomic slowdown, the company has are capitalized and accounted for, it on debt) for additional acquisitions
held on to the stated aim on open- increases the liability by a significant and store openings or to weather
ing 15% more outlets in 2009 while amount. However, despite this ob- difficult periods.
CALKAIN COMPANIES, INC. NET LEASE ADVISOR Third Quarter 2009

7. What Is Defeasance?
By: Chuck Spencer
D
efeasance is the preferred The price of a defeasance is com-
form of call protection for prised of two components; the secu-
fixed-rate conduit/com- rities cost and transaction fees. The
mercial mortgage backed securi- securities cost is a function of the
ties (CMBS) loans. Defeasance has spread between the loan coupon and
become so prevalent in securitized the yield on the securities on the
loans that life insurance companies, date the securities are purchased. A
HUD, and others seeking to preserve defeasance premium occurs when
the ability to securitize their loans the loan coupon is higher than the
have incorporated defeasance into average yield on the securities and a
their form loan documents as well. defeasance discount occurs when the
A defeasance is basically “a substitu- loan coupon is lower than the aver-
tion of collateral.” It is not a simple age yield on the securities. To get an
prepayment but a financial and legal initial estimate use an online defea-
transaction that typically takes 30-45 sance calculator (www.defeasewith-
days to complete. In the defeasance ease.com). To get the most accurate
process, the borrower uses proceeds estimate, the first step is to gather
from a sale or refinance to pur- your loan documentation and submit
chase a portfolio of U.S. government it to a defeasance consultant for help
securities that is sufficient to make in estimating defeasance costs well
the remaining principal and interest before your anticipated sale or refi-
payments when they come due. The nance. The consultant will be able to
securities are pledged to the lender, review your documents for any cost
and the lender releases the real savings, such as types of securities
estate from the lien of the mortgage. and prepayment dates.
The promissory note, which remains F O R M O R E I N F O R M AT I O N :
outstanding, and the portfolio of Commercial Defeasance, LLC
securities are assigned by the bor- 1-800-624-4779 Toll Free
rower to a special purpose succes- info@cdfllc.com
sor borrower. www.defeasewithease.com
CALKAIN COMPANIES, INC. NET LEASE ADVISOR Third Quarter 2009

8. ...GREEN Continued from page 5
sustainable buildings. LEED awards Calkain’s Shane Scanlon Class of ‘09 Featured in
one of four levels of certification
upon completion (certified, silver, University of Tampa Spring 2009 Alumni Journal
gold or platinum) to recognize a
building’s degree of achievement
W
and performance in sustainable site hen Shane Scanlon ’09 walked into an
development, water savings, energy internship fair in 2007, he had no idea
efficiency, materials selection and he was taking the first step toward
indoor environmental quality. The professional employment. It was there that he first
cost of LEED certification is dif- got in touch with representatives from Calkain
Companies in Tampa and landed an internship as a
ferent for every project because it
research assistant the following spring.
is determined based on a variety
of factors, such as size and type of Today Scanlon is still going strong with Calkain,
building, level of certification, the employed part time as a research assistant, a job
credits selected to complete, and that gives this business management major hands-
USGBC membership. This cost is on knowledge of the real estate industry.
a contributor to the green cost
premium and adds on average “Calkain allows a great deal of decision-making to be done on your own
$2,000 to the total cost of a build- compared to simply making the decisions for you,” Scanlon said. “(It) al-
ing (other soft costs such as the lowed me to learn in a more active way.” As an intern, Scanlon worked di-
time it takes to complete required rectly with everyone in the company from the CEO and vice president to
documentation are not included in the individual brokers. His chief duties introduced him to the basics of the
this figure). In an attempt to fur- company’s investments, properties, and market information and different
ther encourage the development types of contract agreements. As an employee, his duties have expanded
and he now plays a bigger role in managing the company’s transactions.
of green buildings, USGBC made
LEED free for projects that receive “My knowledge of this industry entering into the internship was very
the highest level of certification, limited, and Calkain has expanded upon that knowledge greatly,” Scanlon
platinum. Although LEED certifica- said. “(The internship) also unlocked an opportunity for me to stay with
tion isn’t necessary to construct the firm.”
a green building, it supplies third
party verification that a building is
maximizing operational efficiency tial cost, complexity and aggres- net metering, grants, expedited
while minimizing environmental siveness that would be required. permitting, reduced rate loans, fee
impact, which may be important to The bill passed in the U.S. House reductions/waivers, and tax deduc-
perspective tenants. Other orga- of Representatives on June 26th, tions/credits. These programs will
nizations with similar goals have 2009 and is expected to reach the presumably be phased out as green
formed, such as the Florida Green senate by mid-September. buildings are government mandated
Building Coalition’s (FGBC) Green and become the standard. Compa-
Commercial Building Standard and Despite the current market, the nies that recognize a small up-
the EPA’s ENERGY STAR® label overall green building movement front outlay in “green” is a smart,
for commercial buildings. These has maintained constant growth. profitable investment and adopt
organizations provide lower cost, Greenbuild, the world’s largest green buildings sooner rather than
or in ENERGY STAR’s case no conference and expo dedicated later will benefit from all angles.
cost, alternatives to LEED certifi- to green building, had more than Whether it’s increased return on
cation. In the U.S. it may soon be 28,000 attendees in 2008, which investment, improved occupant
government mandated, as a result is an increase of 25% from Green- heath, or a reduced impact on the
of proposed legislation HR 2454 build 2007. The sustained growth in environment, everyone has some-
(The American Clean Energy and this sector may be baffling to those thing to gain from the transforma-
Security Act of 2009), for new con- who believe in sticking to what tion of commercial real estate into
struction and renovation projects they know during hard economic a sustainable industry.
of commercial buildings to meet times; however, departure from
stringent national energy efficiency conventional buildings may be ex- GET INVOLVED!
standards which exceed the exist- actly what is needed to boost busi- For more information on advertising
ing energy code (ASHRAE 90.1) by nesses bottom lines and protect or how to contribute:
30% immediately and 50% by 2015. them from future volatility of the
David Sobelman
Although the real estate industry market. Several state and municipal Calkain Companies, Inc.
could directly benefit from a few governments currently have incen- 500 N West Shore Blvd
provisions in the proposed legis- tive programs in place to encour- Suite #605
Tampa, FL 33609
lation, there has been extensive age private development of green Tel: (813) 282-6000
criticism pertaining to the poten- buildings including bonus density, dsobelman@calkain.com
CALKAIN COMPANIES, INC. NET LEASE ADVISOR Third Quarter 2009