Single-tenant net lease private equity real estate funds have many advantages.

Hannah Kirby, principal managing partner of HHKirby Real Estate Ventures, joins the show to discuss the availability and benefits of investments in single-tenant net lease funds.

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Episode Highlights

• Hannah’s Opportunity Zone investing experience, and why she’s transitioning out of OZs and into other forms of private placement fund offerings.
• Some of the ways in which individual investors can participate in the real estate investment space, including REITs, ETFs, direct ownership, private placement funds, and single tenant net lease funds.
• The availability and benefits of single-tenant net lease funds to individual investors.
• Why car washes and quick-serve restaurants are ideally suited for single-tenant net lease investments.
• How individual investors can access private placement real estate funds through self-directed IRAs.

Featured On Today’s Episode

• Episode 160: OZ Investing In Tertiary Markets, With Hannah Kirby
• Episode 239: Rural Community Impact In Opportunity Zones, With Jennifer Whitney

Guest: Hannah Kirby, HHKirby Real Estate Ventures

• Hannah Kirby on LinkedIn
• HHKirby Real Estate Ventures

About The Opportunity Zones & Private Equity Show

Hosted by OpportunityDb and WealthChannel founder Jimmy Atkinson, The Opportunity Zones & Private Equity Show features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in Opportunity Zones and the broader private equity landscape.

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Show Transcript

Jimmy: Welcome to the show. I’m Jimmy Atkinson. Something a little different on today’s episode, we’re talking about, primarily non-opportunity zone, single-tenant net lease funds. My guest today is Hannah Kirby of HHKirby Real Estate Ventures, and she joins us today from Washington, North Carolina. Hannah, thanks for coming on the show. Great to see you again. How are you?

Hannah: Welcome. Great. And great to see you again as well.

Jimmy: Well, before we dive into today’s topic, single-tenant net lease, single-tenant net lease funds, I’m sure my audience, Hannah, a lot of high-net-worth investors, a lot of advisors may already be somewhat familiar with you since you’ve been active in the Opportunity Zone space previously. But for those who may be unfamiliar with you, can you give us a little bit more of your background story? Where did you come from? Who are you? What are you doing?

Hannah: Well, I relocated to North Carolina from southern California a few years ago and immediately jumped into Opportunity Zones because the law was passed, it was 2017. And I thought at the time that basically it was a great idea for tertiary markets. So, I started with OZs in these very tertiary markets and became acquainted with a lot of small towns in North Carolina and a lot of necessity for OZ investment. And as the years evolved and as OZs evolved, I found that I provided much more value to local OZs. So, more or less communities that wanted to set up their own funds with some local people and providing them with sort of the economics of all of it. How would the capital stack pan out? How would this look if they refined in five years? Things like that.

So, I got involved on a lot of different asset classes. Actually, I worked with an airport, worked with a couple of shopping centers, a couple of student housing developments and things like that in areas that I had no idea even existed in North Carolina. So, that’s basically. And my work in OZ in western North Carolina kind of… I was introduced to a developer who has subsequently become the build-a-suit developer for a couple of different asset classes. One of them, a quick-serve restaurant that’s really well known here in the south called Bojangles, and another, a car wash out of Georgia called Big Peach Car Wash. So, I sort of migrated from OZs into car washes. And I don’t know if that’s a natural migration or not.

Jimmy: Interesting. Well, it’s your migration, at least. And we’ve got one thing in common. We’re both out of southern California now. I moved from southern California to Fort Worth, Texas a few years ago. You moved from southern California to North Carolina a few years ago. And, yeah, Hannah, you were actually on the podcast previously. I’ll make sure to link to that episode in today’s show notes for today’s episode at opportunitydb.com/podcast. That was a few years back, but if anybody wants to see what Hannah was up to a few years ago, you can learn more at that episode. Why did you move out of Opportunity Zones, though? I’m just kind of curious about your path out of OZs.

Hannah: Again, I think I found that my value was more like sort of starting to do these capital stacks and sort of pro-forma capitalization for developers. And the OZs in tertiary markets didn’t really gain much traction. A lot of the OZs became really big funds, as you well know. I still have a really nice, beautiful Opportunity Zone project going on in Bishop, California, which if you grew up in southern California, if you’re familiar with Mammoth and Mammoth Ski Area. So, at any rate, yeah, I still have a project in downtown Bishop. But again, the really small funds have been difficult unless you have a lot of local participation. And I think that’s the key to the really small funds, is that you really do have to bring local investors into the parade because they understand what you’re doing on a local level rather than 500-unit. Multi-family is pretty much self-explanatory in Chicago, but it’s not in rural North Carolina.

Jimmy: Or in Bishop, California, maybe. By the way…

Hannah: Or in Bishop, California.

Jimmy: And we featured that Bishop development…

Hannah: You do.

Jimmy: …on the show some time back as well. So, I’ll link to that in the show notes for today’s episode as well. That’s still a great project that’s ongoing, if I understand correctly, right?

Hannah: Yeah, it’s a beautiful project. The plans are lovely for it. And, yeah, again, the financials work out well. So, that’s definitely worth a look at.

Jimmy: Good. And so now you’ve kind of moved into this new space and kind of to tee it up, you know, you’re trying to be attractive to individual investors in the real estate investment space. And so what are options for individual investors if they wanna get into the real estate investment space? I guess they can invest into REITs. They can invest into ETFs that are often structured as REITs. They can buy and hold property directly, direct ownership. They can get involved with private placement funds. One type of private placement fund is the types of funds you’re working on, Hannah, which are single-tenant net lease funds. So, tell us a little bit more about those options available to individual investors. And what is the appeal of single-tenant net lease funds?

Hannah: Okay. That’s a lot to unpack at any rate. So, basically, as you mentioned, there’s a lot of different avenues for individual investors to be in real estate. And depending on your level of risk, you could go all the way from an ETF into private placement fund, which is what we’re representing. Single-tenant net lease is very popular with real estate investment trusts primarily because of their security.

So, they’re almost equated to the equity level of the bond market, if you were… In terms of their level of risk and returns. So, you’re looking at, like, think, for instance, Starbucks or think McDonald’s. McDonald’s doesn’t typically hold its real estate. It may buy a piece of real estate, a building on that real estate, but by and large, they do not wanna hold that real estate on their books because they’re not in the real estate business, they’re in the burger business. And so, it makes more sense for them to basically sell that asset off and lease it back.

And from an economic standpoint, anybody that looks at this kind of scenario can see, it’s much more beneficial for me to have an expense called a lease than it is for me to have an asset that doesn’t necessarily add to my EBITDA. So, I’m not making money on the real estate if I hold it, right? But I can get to expense off that lease. And from a debt standpoint, when you’re looking at building larger structures and things like that, when we look at more institutional single-tenant net leases, the asset itself could cost several million dollars. So, if you’re talking about a $15 million industrial building that my factory is going to be in, it doesn’t necessarily make sense for that $15 million in assets just to be there from the bank.

So, moving on, we decided that since we have the arrangement to build these assets for the owner, so we’re looking at, for instance, with Big Peach Car Wash, right? These guys started off with one store in Foresight. They quickly ramped that revenue stream up to $2 million a year. So, now they’re basically operating… The owner is operators of that. They still own the real estate, but they would like to build another car wash. So, in order for them to basically build another car wash, they’re going to have to borrow money. And this is the real key to a single-tenant net lease and why the owners typically don’t hold the assets. Because when you wanna go and build another building, right, you got to borrow money to do that.

Well, you already borrowed money from the first building, so now you got to pay that loan off for you to get the new loan to build the new building. Hence, comes, let’s sell it to a group of investors, we lease it from them and we assume all of the expenses. So, the taxes, we assume the taxes, we assume the maintenance, and we assume the… I’d said taxes and maintenance. Taxes, maintenance, insurance. Everything that goes along with operating the business or operating the asset, right?

So, the owner, the landlord, if you will, which is now, in our case, a fund that we’ve put together, we can basically own this asset, collect the rent for 30 years or more on that asset, and not have any responsibility for it under the lease agreement. And that’s the key. This is really the big benefit to both individual investors and to the owners or the operators. So, moving into institutionalizing this, which has been done all over the place, to the tune of about $70 billion worth of institutional assets sitting out there in single-tenant net lease.

Most individual investors can’t get into this space unless they are participating in a REIT or if they have a lot of cash that they could throw at them because they’re expensive assets. So, with a fund, we can offer an individual, accredited investor an investment level that makes sense for them. So, say, $25,000 to $50,000, which makes sense that now you’re participating in this asset class, which, again, is very difficult to get into because it’s expensive, plus, it’s really popular. So, there’s some deep pockets there that can basically buy these up. So, that’s it, in a nutshell.

Jimmy: So, instead of needing a few million dollars to buy a strip mall, or a car wash, or the land that the McDonald’s or the Bojangles is on top of, an individual investor can come in, write you a check for 25k, maybe 50k, somewhere in that range. Maybe 100k or more, if they’re comfortable with that, and get fractionalized ownership in this fund that holds that property. This is like a triple-net lease situation, but it’s a single tenant, right? Is that basically it?

Hannah: That’s exactly it. Yeah, that’s exactly it. It’s triple net all the way, but it’s one tenant. So, all of the assets that are sitting in this fund, these particular funds, will be basically rented by the same lessee…

Jimmy: Got it. So, a fund…

Hannah: …and operate it.

Jimmy: Right. Understood. Understood. The fund that your investors come into, do you have one big multi-asset fund that has multiple properties that are all single net lease or…?

Hannah: But they’re the same asset classes and they’re the same asset and operator. So, basically, we’ve diversified on location, but we’re not diversifying on, we may, in the future, actually offer like a Dairy Queen, a Starbucks, a Bojangles, and a car wash. But right now, we’re focusing on expanding the car wash. And to do that, basically, we will keep all of the same owners, the same operators will be part of it. And the other thing is the partnership, the GP partnership in the Fawn is actually the owners of the car wash sponsor, actually, are the current owners of the car wash, plus our development team, plus the management team.

Jimmy: Good. So, if I’m an investor looking at this opportunity, how does this type of fund differ from getting into a REIT, let’s say?

Hannah: First of all, you have to be an accredited investor. So, a difference that way. So, basically, and I think the biggest difference is you’re looking at, with a REIT, you’re more or less investing in a stock, right, or an ETF. You’re more or less looking at thousands of assets that move in and out of the fund. So, with a REIT, obviously, they’re acquiring assets. They have a whole team of people that are out there looking for those assets to acquire.

So, from an expense standpoint, their expenditures are far greater than ours because we’re already building the assets. We already know where they’ll be, when they’ll get built, and when they’ll be ready to lease. But with a REIT, they’re moving assets in and out of those REITs all the time. So, they’re selling aging assets and they’re buying new assets. And that’s a big part of their admin, you know, is buying and selling real estate. And it has to be, just because by the nature of what they do, it is that. So, the expense ratio is much different for us because we know what assets are going to be participating in the fund.

Jimmy: And your fund is typically more concentrated, oftentimes, much more concentrated than a huge multi-asset REIT might be. Okay, that makes sense. Do you ever structure these as 1031 exchange deals or DSTs for investors who wanna take advantage of that section of the tax code?

Hannah: I’m not sure. We haven’t yet. They may qualify. More or less, I think of 1031 as having to be a like-for-like exchange. So, if somebody had, let’s say, a quick-serve restaurant because most people don’t exchange car washes yet, but it would have to be a one-for-one. That would be outside of the fund, I think the fund’s purview because from a 1031 standpoint, I’m not sure whether or not we’d qualify as a like-for-like.

Jimmy: Understood. Got it.

Hannah: Whether or not a fractional share in a fund would qualify.

Jimmy: Yeah. I think it would have to be structured as a Delaware statutory trust, but we’ll leave that there. Maybe you can revisit us in a year when you get your DST set up, possibly.

Hannah: That’s true. That’s true. That is the thing that’s come up a lot. One of the things that we are looking at right now is self-directed IRAs.

Jimmy: Yeah. So, talk to me more about that.

Hannah: Yeah, yeah. A number of outlets, if you will, or a number of custodial outlets are advertising now the ability to take portions of your IRA and invest them in real estate and invest them in other asset classes, aside from the standard Charles Schwab, Ameritrade type of IRA custodial agreement. And these are called self-directed IRAs. So, apparently, being self-directed, you get to decide what asset you’re going to invest in. They remain the custodial account holder for those investments, and you get to have the tax advantages still of holding that asset in your IRA with the enhanced returns of real estate. So, we’re exploring this, and we have partnered with one called Alto IRA. And again, you sign up, you move portions of your IRA to their custodial platform, if you will, and then you are able to participate in our fund, particularly car wash fund right now.

Jimmy: Yeah. Self-directed IRAs are fascinating to me. We’re starting to cover them a little bit more at our new wealth channel platform, taxfreeinvesting.co. But, frankly, I don’t really know a whole lot about them just yet. But I do know that, you know, unlike a traditional IRA that you hold at Schwab, or Fidelity, or Vanguard, you really only can invest in publicly-traded securities, stocks, bonds, mutual funds, ETFs, with a self-directed IRA, you can invest in private placement vehicles and more real estate. And it seems like it’s very investor-friendly, gives the investor a lot more options. Hannah, I kind of like that. I think it’s smart of you to partner with that group, Alto. And I’ll make sure to link to Alto in the show notes for today’s episode as well. Hey, talk to me, Hannah, about the sectors that you’re in with respect to your single-tenant net leases. Why quick-serve restaurants and why car washes? Maybe you can give us the bull case to these two…

Hannah: Well, car washes are probably the most fun only since they’ve become the darlings of private equity. So, a lot of car washes…one thing interesting about car washes is, like, the five largest car wash holders, right? Private equity firms that hold car washes probably have touched about 3% of the market share. There are mom-and-pop car washes everywhere. So, if you look at it from that standpoint, right? Even acquisition-level of existing mom and pops, private has decided that this is the new darling. And again, the revenue model shifted for car washes.

So, once the technology became such that you could sign up for a membership and get your car washed for like $30 a month, as many times as you wanted to, that made car washes like a consistent revenue stream, right? So, you had guaranteed revenue. So, I can predict, you know, in a pro forma way, right? I can predict my revenue stream five years out. And then by those predictions, I can also predict an IRR for investors. So, now I can say, say, “Okay, I can give you something percent on a car wash investment.” And I think that’s why private equity has jumped all over these guys. As a matter of fact, big piece, the car wash that we are working with is in negotiations right now to expand considerably with private equity.

Jimmy: It sounds a lot like self-storage or maybe where self-storage was a decade ago, right? You’ve got the recurring revenue coming in. A lot of these private equity firms have rolled up a lot of these mom-and-pop shops. Maybe that’s where car… That’s amazing that the biggest investors only hold 3% of the market. It’s really…

Hannah: Yeah, it may be a little bit more now. I mean, my data may be a little bit older because things go by so quickly anymore, especially when you start looking things up. Yeah, it is. There are mom-and-pop car washes everywhere. And they’re not necessarily the express car washes, but they’re building them like crazy. And I live in a very small town, and we have two. We have one operating, and we have another one going. And I can imagine, you know what? I always think about, well, southern California, right? You can’t wash your car in southern California because there’s no water. So, at any rate, they’ve also adapted the technology such that they’re very environmentally friendly.

So, water reclamation is huge. Chemical reclamation…you know, separating chemicals out of the water, those kinds of things are huge with this new technology. There’s a number of organizations now that are enhancing all the computer technology behind these car washes and things like that. So, yeah, I think from that, they’re stable. I mean, everybody’s got to wash their car, at least most people wash their car. But, yeah, it’s one of those things that it’s also internet-proof, right, because you physically go there. So, even in a bad economy, most people are gonna still wash their car. So, yeah. It’s… Go ahead.

Jimmy: And about quick what about quick-serve restaurants? Give me the bull case for Bojangles and other types of … like that.

Hannah: Yeah, they’ve already been. I mean, the thing about that, if you look Starbucks, if you look at any of them, if you go out on any website and search for single-tenant netlist properties, the bulk of those properties are gonna be quick-serve restaurants, they’re gonna be Dairy Queen, they’re gonna be Burger King, they’re going to be any Taco Bell. The other area then, the other asset class that I think is really big in single-tenant net lease are drugstores, QVC, Walgreens, those kinds… Because the tenants, they build a suit. So, the asset is actually built for that tenant, right? So that tenant is gonna lease that asset for at least 20 years. So, you have a rental agreement there that’s 20 years long. I mean, you have a steady guaranteed income if you buy the asset. Unless, of course, things go wrong and they go bankrupt and you never know what’s gonna happen with anything in real estate.

Jimmy: There’s always risks in investing. There’s no sure thing.

Hannah: There’s always risks. I would never discount the risks. But one thing about single-tenant net lease and why it’s so popular and why it’s so institutionalized is its stability. Again, it’s kind of there’s a lot to be said for aligning it with the bonds of equity markets but found out…

Jimmy: Yeah, I know. I guess you could say it’s a little lower risk, although the risk is concentrated, but you’re always gonna have a trade-off there. So, let’s talk about your fund administration, because before we started recording this episode, you were starting to talk to me about how you’re handling a lot of your investor transactions on a distributed ledger, also known as blockchain. Tell me more about that. What’s going there?

Hannah: We’re really excited about this. And this was through a colleague of mine that all of us that were in the OZ space attended a number of conferences and things like that through the years. So, at any rate, this was through a colleague that left one of the big REITs that was a single-tenant net lease REIT to work with the formation of a new fund administration platform called Verivend. And Verivend, the only thing I can say about it is it’s like the Venmo of fundraiser, of fund administration. So, what they call is the investor experience.

They provide a platform for the investor where the investor interacts with that platform and necessarily with you. So, say, I have my investors, they’re interested in my fund, I can say, “Hey, are you interested in the car wash fund?” “Yeah, I think I could be in the car wash fund for this or that, right?” I don’t necessarily have to put that person in my spreadsheet, get their bank account information, right? Notify them by email, which will probably go, once email goes off of the screen, we all know that email is lost forever. It’s like, sorry, once you’re off the screen, you’re done.

Jimmy: Very true.

Hannah: Yeah, I know. So, they don’t have to make sure that they get an email from me for a cash call, right? I can send out a cash call that basically they’ll get, like, a notification from the platform that there’s a cash flow out there. “Are you in or…?” Basically, “Yeah, I’m in for X.” They hit a button, right, and the transaction occurs, and funds…

Jimmy: And it’s already linked to their bank account and it’s already got their NYC info.

Hannah: They’re already linked to… I don’t have their bank account information. It’s on a distributed ledger. It’s blockchain. Nobody can… I don’t transact with their bank anymore, which is, I think, a wonderful way to do business with mostly anybody now. Look at how we buy things, right? We buy things on Amazon, and most of us have our own Amazon account. And when we wanna go buy things, we go click, “Okay, I wanna buy that thing.” So, we’re used to this now, right? So, why not transfer that user experience to basically your fund administration, right, where cash call, “Oh, yeah. Okay, good. I’m done. I clicked. It took me 10 minutes or less to basically fulfill that.” They have record of it. There’s a number of YouTube videos out by these guys. And if you look at it, they have a full-on, basically, historical record of everything that they’ve done, and so do I, from the fund level.

So, they have a public area where I could post. I can post updates. I can post new store, new fund announcements. I can do quarterly reporting. They don’t have to look for those K1s. Our auditing firm, or basically, our accounting firm, can also download all of the K1s, all the tax information directly into their account. It’s automatically there. They just go in their account. They don’t have to worry about me emailing it or, heaven forbid, it goes in the mail. That never happens anymore, I don’t think. But at any rate, no, we’re really excited about it. We’re really excited about kind of being on this cutting edge of the blockchain technology. Not in crypto, but using the security of blockchain technology to secure the investor experience, I think is really significant.

Jimmy: No, sounds really neat. I’ll make sure to link the Verivend on the show notes for today’s episode. We’ve got some work to do…

Hannah: They’ll be really happy if you do.

Jimmy: Hannah, we’re kind of winding down our time here today. Thanks for joining, by the way. It’s been great getting your insights today.

Hannah: Thank you so much.

Jimmy: Before I let you go, just a couple more questions to hit you with. I’m just curious, given your expertise and experience in private equity real estate, what do you feel are some of the most important trends in commercial real estate that investors should have their eye on going forward?

Hannah: Aside from the new move, like the asset classes shifting away from the multi-family model, we’re looking at these different things. One area, I think, that’s gonna be huge is gonna be industrial. And I think for the same reasons that quick-serve restaurants, and drugstores, and car washes offer a single-tenant net lease option, I think industrial buildings are gonna go that way as well, where you’re gonna see them offloading the real estate because why. And it makes sense for an investor because basically now the investor gets to participate in that growth without necessarily being able to buy a $40 million building. But I think industrial is huge. But also, one of the areas, and I know I’ve spoke to you about this before because I’m really keen on it, is franchising.

So, a lot of these, McDonald’s being a huge franchise organization, as well as the other quick-serve restaurants, franchising these, franchising car services, I think one of the things that’s gonna piggyback on car wash is gonna be oil change and certainly collision centers, those kinds of maintenance organizations where you can set up in every given community, right? And once you have the blueprint for the franchise, once you know how to operate these successfully, you can bring in franchisees that once, if they follow the mold, they’re gonna make money. That’s a great way. I think that’s a great option for individual investors. And I also think owning, again, I’m flipping it over, if you own the franchised asset real estate, you’re gonna make money.

Jimmy: Yeah. Well, nothing wrong with making a little money. Hey, Hannah, this has been great. Where can our audience of high-net-worth investors and advisors go to learn more about you and some of your opportunities?

Hannah: I feel like I should pop up a QR code. And I was almost gonna do that. Here’s my QR code. You could reach me at [email protected]. And basically, if you’re interested in what we’re doing with the single-tenant net lease funds, which we hope you are, the website is kodiakstnl.io.

Jimmy: All right. Well, I’ll make sure to link to that and your email address in the show notes for today’s episode. We’ll have show notes available, as we always do at opportunitydb.com/podcast. I’ll have links to all of the resources that Hannah and I discussed on today’s episode. And please be sure to subscribe to us on YouTube or your favorite podcast-listening platform to always get the latest episodes. Hannah, thanks again so much for joining me today. It’s been a pleasure speaking with you.

Hannah: Thank you so much. You as well. Thanks. Take care.