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White Paper

This opportunity isn't for everyone. Check your eligibility to invest with us at www.JGMellon.com/Investing

NNN LEASEREAL ESTATE INVESTING

Investor White Paper Series

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White Paper White Paper

This opportunity isn't for everyone. Check your eligibility to invest with us at www.JGMellon.com/Investing This opportunity isn't for everyone. Check your eligibility to invest with us at www.JGMellon.com/Investing

A “triple-net” (NNN) lease is the blue chip of real estate investments. It offers a reliable and absolutely predictable source of long-term revenue from large, well-capitalized, national-brand tenants that have been around for decades and will be around for many more. In fact, our strategy targets top pharmacy and grocery retailers that have not only survived the worst economic downturn in our lifetimes (and the rise of online shopping), but they have actually thrived because of their ability to tap into

A Whitepaper Report from JG Mellon

Stabilized Real Estate Investment Fund

government-subsidized entitlement programs for food and medical support – as well as the basic needs of every household in America.

The NNN lease by itself has long been considered an easily manageable and dependable investment. But it is the unique expertise and strategies of the Mellon financial team that have transformed this investment class into a holding that is also much more secure and lucrative than competitive offerings.

http://www.jgmellon.com/investing


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(at least not in the short term).

A typical NNN lease runs for a twenty-year term, often with built-in increases every five years. If property values should ever experience another significant dip, you will likely have a long period time to ride out the storm without any adverse effect on the monthly income prescribed by the lease. You are pretty much immune to market variations both in terms of the tenant’s business or stock value, as well as the real estate market. As long as you hold the property and the tenant stays in business, your return remains guaranteed.Of course, no investment is ever 100 percent secure. Let’s look at some possible downside scenarios.

What happens if the location you own performs poorly and the tenant decides to close it?

Don’t worry – you’re safe.

The company is still bound to the lease for the full amount and for the entire term. They will use their national income to pay the rent for the shuttered property. Certainly, it is likely that they will want to offer a settlement to pay a lump sum now in order to get out of the lease, but that will give the owner plenty of time to either find a new tenant or sell the property. If the property value drops due to the loss of the rental income or loss of a strong tenant, then the owner will demand that any difference in the sale price be made up in the settlement amount before he agrees to terms.

(The sale price of an NNN lease property is based on the value of the lease and the strength of the

Before we delve too deeply into the details of our strategic investment philosophy, our preferred tenants, and the comparative performance of our brand, let’s make sure that you fully understand the complete dynamics of the NNN lease concept and why it is a winning proposition for tenants and investors alike.

The NNN LeaseThe “NNN” simply refers to the expenses that the tenant is responsible to pay, leaving the value of the lease as “net” income to the investor. The lease payment from the tenant is “net” of taxes - including property taxes, “net” of insurance,

Through a systematic

analysis, the usually

inversely proportional

elements of LOW RISK and

HIGH RETURN have been

strategically harnessed into

an investment-grade “sweet

spot” that pairs “safe” high-

quality tenant companies

with lower-cost Midwestern

real estate.

youre turn is not affected by the rollercoaster financials of the tenant company you invest in, the broader market and state of the economy – or even by the fluctuating valuations of

THE REAL ESTATE MARKET

and “net” of maintenance and repairs. The tenant pays all those expenses. Although there may be some differences in the terms of various leases, the triple-net lease is basically a “hands-off” portfolio investment with no landlord responsibilities or expenses in day-to-day matters.

There are very few businesses where the bottom line net income is equal to the top line gross revenue; but the triple-net lease comes pretty close, as it transforms the landlord and property management business into a simple investment. Collecting the rent and paying the mortgage, if any, are generally the only regular duties of the property owner/lease-holder. This makes the NNN investment as easy and inexpensive to manage as a stock portfolio, and it also makes the income very predictable. Unlike a stock, you know exactly how much revenue you’ll receive on the first day of every month for years to come.

And unlike most any other investment (except perhaps low-yielding CDs), your NNN ROI is not a crapshoot; it’s carved in stone – plus, you don’t have to wait for months or years for your meager payday. Furthermore,


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tenant that stands behind it and not so much on the real property itself. The multiple, or “cap rate,” which translates the annual rent into a sales price, determines the property value, as we will discuss next.)

What about bankruptcy of the tenant on a national scale? This can be a problem, which is why tenant selection and asset value is a key part of our strategy.

If the tenant files for protection while they reorganize, the court may allow them to renegotiate the lease and even close some locations and void those leases in order to resize themselves into a profitable company. If they liquidate, their assets will be sold and divided among major creditors, and the lease will be considered a lien in the investor’s favor. Depending on the assets of the failing company, creditors may receive several months or years worth of rent, or perhaps only pennies on the dollar.

This is one place where the Mellon strategy shines. If your tenant was Circuit City, Borders Group bookstores, or an ill-fated restaurant chain, you might find yourself facing a loss. But, if your tenant is one of the top half-dozen drugstore or grocery retailers, chances are that you will never find yourself in that situation. And, if something should happen, our retailers are very well capitalized with assets that offer high protection in the unlikely case of liquidation.

The Cap RateThe capitalization, or “cap” rate, is the percentage of the selling price that is equal to one year’s rent. In actuality, the seller will typically start with the amount of the rent, annualized, and divide it by the appropriate cap rate to get the fair market price.

For instance, if the annual rent is $100,000 and the cap rate is 10%, then the price to buy the property and the lease would be $1 million. An 8% cap rate would require a purchase price of $1.25 million, and a 12.5% cap rate would result in a price of $800,000. The higher the cap rate, the lower the price.

As you would imagine, the stronger the asset base and credit credentials of the retail tenant, the lower the cap rate is likely to be. A triple-A tenant means low risk and, therefore, the lease is worth more. The buyer assumes less risk and is therefore willing to settle for a lower return by paying more for the property.

When you negotiate to buy an NNN leased property, you are typically bargaining over the cap rate and not over the amount of rent, which is probably already determined, especially if it is an existing lease. The higher the cap rate you can negotiate, the lower the price you will pay.

The cap rate, in essence, is your ROI. If you are receiving $100,000 in rent on a million-dollar property, you are earning a 10% return, which is also your cap rate. If you paid 50% down, then your investment is only half-a-million, and about half of your rental income will go towards the principal of your mortgage – so, your “gross”

ROI is still 10%. However, your actual ROI will be reduced by the amount of interest you are paying on the money you borrowed to leverage the deal. But remember, the tenant is paying the taxes and the insurance as well as the repairs and maintenance. The investor pays only to service his own debt. Remember, too, that a good portion of your debt service is really being paid to you. That’s because

OUR LONG-TERM RETURN is increased by the amount of principal you pay plus the amount the property appreciates every month. These both become equity and add to the return when you sell. It’s somewhat like reinvesting your dividends

to get more “free” stock.

The actual amount of the rent itself is typically determined by a price per square foot. That price, in turn, is determined by the “real” value of the property and its location. A 12,500 square foot property at $28 per square foot would rent for $350,000 a year and, at a 7% cap rate, it would sell for $5 million. The same NNN lease on a similar property with a less lucrative tenant and/or is located in an area where property values are lower might sell for $3.5 million at a 10% cap rate. A lower-rent city may only garner $24


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a square foot instead of $28, yielding $300,000 in annualized rent and a $3 million price tag, but your rate of return would still be 10%.

What’s In It for the Tenant?You might wonder, at first, why a well-capitalized tenant would want to pay rent when a mortgage is “cheaper” than a lease. Wouldn’t just the companies that don’t have good enough credit or enough capital resources to buy become

Needless to say, they would have far fewer properties and far lower revenues.

Secondly, if the company finances the property with a mortgage, then they have a ton of debt to show on their balance sheet. Debt doesn’t look good to investors, and it makes it difficult to get more and more loans from banks for expansion when they already have a lot of debt. It drags down their credit rating and turns cash into equity with little liquidity.

Along the same lines, freeing up their cash and lines of credit allows companies to be light on their feet, cash rich, and expand aggressively. Many companies that had owned their own properties for decades have sold everything and leased it back as a way of generating cash. The cash generated from each sale provides enough cash for them to acquire land and construct a new property which, in turn, they can turn around and sell with a lease back and then build another store…and so on, and so on.

You can see how it would be easy for a cash-rich company to buy a million-dollar parcel of land, pay another $2 million to build a new store, and then (especially if they can command a low cap rate) sell it with a $325,000 NNN lease for $4 or 5 million dollars. They can take $3 million of that to open another location and bank another million or two, which is enough to cover perhaps four or five or six years of the lease. As long as the money keeps moving, everybody gets what they want long into the future.

Walgreens opened 212 new locations in 2012 and 198 in 2013, and they lead the drug store market with 8,582 stores. According to their website, they filled 821 million prescriptions in fiscal 2012 – which amounts to 2.6 prescriptions for every man, woman, and child in the United States. With their average prescription price of

tenants? Will there be a steady and long-term supply of great tenants who are interested in running their businesses in NNN leased properties? Or will the market evaporate?

The truth is that virtually every modern business plan is turning to the NNN lease vehicle for several practical reasons.

First of all, lease payments are an expense that can be written off on the corporate tax return in full every year. Property, on the other hand, is an asset that has to be depreciated over the life of the loan. The interest may not even be fully deductible and, while the equity is a paper asset, they can’t spend it. They can borrow against their equity and pay interest (to the point that banks will fund them), or they can deposit their cash and earn interest or use the cash in other ways that will benefit their business.

had just $2.5 million tied up in each of their 8,500 RETAIL PROPERTIES (and their stores typically cost twice that amount or more), they would have over $20 billion in “dead” cash that would not be actively working for

the benefit of their company.

$57 each, that amounts to about $47 million in revenues, or 65% of their total revenue of $72.2 million. They serve 6.3 million customers every day, and each of their 8,500+ stores grosses about $8.5 million a year. Even a $400,000 lease still represents less than 5% of their gross revenues.

The JG Mellon NNN Investment Model

The JG Mellon NNN Investment Model is designed to be a reliable, cash-producing machine that remains steady and predictable over a long-term duration. In order to achieve this goal, WE ANALYZE EVERY REAL ESTATE INVESTMENT the same way you would analyze a stock.



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We look not only at the year-end financial numbers, but also at the operational numbers that generated them, the current business climate in the industry, the competitors and start-ups that could take over or dilute the market, new trends and technologies that could pull the rug out from under their customer base, the real assets that a company brings to the table, their management team and philosophy, as well as the location, local marketplace, and demographics.

And, to add an often overlooked extra dimension to our analysis, we look at retail segments that the government supports through direct subsidies to consumers to buy their products as well as non-traditional ways of buying top-tier companies at more attractive cap rates, and buying safe, slightly off-brand, retailers that share the same lucrative market as the over-priced “designer labels.”

Take a look at Walgreens again, as they make their numbers easily available and they are the brand that you could say helped to build the NNN lease vehicle as a top investment. They

acquired 152 existing drug store properties in 2013 and over 500 in the past four years. What if you bought a productive store property from a reliable company at a 9% or 10% cap rate, and then Walgreens acquired it and hung their sign out front? Now you can turn around and sell it at a cap rate of 5.75% or 6.5%. Let’s say it’s an older, smaller location with a $180,000 lease that you picked up at a 9% cap rate for $2 million. When it becomes a Walgreens you can keep earning a more reliable 9% ROI or you can turn around and sell it at the 6% cap rate that a Walgreens store can demand – for a price of $3 million. If it’s an older lease with few years left on the term, you might even get a, let’s say, 12% cap rate and a $1.5 million purchase price. Then, if Walgreens acquires it, when the original lease expires, you might negotiate a $240,000 lease with them, making it worth $4 million at a 6% cap.

Of course, you have to study Walgreens’ history of acquisitions in order to find likely prospects that will also remain as good investments if the original tenant remains. At Mellon, we do all that. You don’t need a crystal ball when you

We’re conservative investors, too, but we have expanded our pool of possibilities and safely increased our returns by understanding and capitalizing on broader aspects of this lucrative market segment.

have the team, the savvy, the experience, and the technology to track and predict the trends and the details that place our returns head and shoulders above our conservative competition.

Of course, retailers like Walgreens and CVS play the game well and have been able to demand steadily decreasing cap rates for their

properties. It is good for a balanced portfolio, of course, to include some lower-yield, highly secure investment properties, but you also need to have safe, high-yield winners as well. Other investment companies ignore this important part of our philosophy.You already know that a nice home in one part of the country may cost $150,000, while a similar home elsewhere could run you $400,000 or more. But, while the cost of your original investment may double or triple, the rents for properties rise only incrementally. Thus, our concentration on thriving properties in the Midwest also brings our clients a higher yield.

While top companies do tend to rely on their brand to negotiate very low cap rates and very high prices, there are other realities that can keep them reined-in when it comes to pricing. First of all, they want to be able to attract buyers. The rent per square foot specified in their lease has to be commensurate with local standards, and the multiple of that rent amount has to yield a price that makes sense for the property involved, or else no bank will approve a loan for someone to buy it. So,



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Michigan? Does that sound a little risky to you? It’s not. The population’s migration patterns have settle down and leveled off, so it is easy to find the stable and growth areas. But that’s not even the most important factor…the people there still eat and they still get medical care – and millions of them are using government money and programs to obtain their food and health care. Nearly 20% of Michigan’s residents receive SNAP benefits (food stamps), as do over 15% in Ohio and Missouri and 14% in Illinois. Compare that to 8% or 9% in states like North Dakota, Nebraska and Minnesota. In 2007, 26 million Americans received about $30 billion in food assistance.

The locations we buy receive millions of dollars in guaranteed government subsidies to individuals, and the national brands that guarantee our leases receive billions of dollars that we can all count on.

And, whereas online companies like Amazon have decimated retailers that sell appliances, electronics, books, and other consumer goods, it will be a long time before people order their bread and milk online or wait days for their prescriptions rather than use the convenient drive-throughs at brick and mortar stores to pick them up.

But there’s another element to look at as well. While many fund managers want the marquee

TOP TENANTS have to make the rent amount high enough to interest qualified buyers, and the price has to remain low enough to match the surrounding real estate market. Those factors alone tend to make credit-tenant NNN properties available at relatively bargain rates in states like Michigan, Wisconsin, and Illinois.

HOWEVER, in 2013, more than 47 million people received over $76 billion for food. Virtually all of this money is channeled through the kinds of grocery retailers we invest in. Billions more in both Medicaid and Affordable Care Act dollars, as well as money from millions of insurance premiums, are channeled through the drug store chains we buy.

value and safety of the top tier of tenants, there are other industry dynamos that offer a very high degree of safety without the designer-label markup. Third-place drug store chain, Rite Aid, has a stable B rating (compared to Walgreens’ BBB and CVS’s BBB+), as well as 4,623 stores and $25 billion in annual sales. Like Avis rental cars in those old commercials, they have to try harder because they are not the leader. They have cap rates of 9% or 10%, rather than 6% – or an ROI equal to 150% or more of the return of its big-name competitors – and they have more frequent built-in rent increases as well.

Another technique for significantly increasing yield is to buy existing leases rather than new construction. A quality tenant and property with

more than 10 years left on the lease still meets our long-term criteria, but there are two factors that can bring down the price. First of all, the fact that there are not the full 20 or 25 years remaining on the lease will “soften” the cap rate and give the investor greater bargaining power. Secondly, the property owner will not be the retail tenant itself or their construction partner. It will be an individual investor or investment firm that may not be willing to wait however long it takes to find the perfect buyer and the perfect deal.

They’ve made their money off this property and may be looking for a quick turnover to buy some other hot investment or to cash out in the present tax year. Since every additional percent added to the cap rate literally knocks 8% to 15% off the



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price, it can be a great way to get a safe, high-yielding property at a bargain price.

Chains like the drug stores we’ve been talking about as well as grocery retailers like Albertson’s, Safeway, SuperValu, Whole Foods and others also often anchor busy strip malls in the same parking lot. The anchor store, which often sells separately, can also be a good indication of the strength of the stores that flock to their porch lamp. Stores like WalMart, Albertson’s, and Walgreens produce hundreds of pages of demographics, traffic, environmental, and financial data on every location where they choose to build, which means that the little guys know the homework has already been done. They can just move in and enjoy the synergy they know they share with certain anchor tenants.

They may not all have the same caliber of management or credit as the anchors, and some will eventually fail, but their spots are generally easy to fill if the location is right. And their smaller size also yields higher rents per square foot. And they won’t all go out of business at the same time either, which is an advantage over a large, single-tenant property.The Final Analysis

You know the value of real estate investment already. Perhaps you’ve even been a successful landlord of residential or commercial and mixed-use properties. If so, then you know the many ways that any real estate investment makes you a winner:

• You WIN from the net amount of the rental income you get each month after your expenses and debt service.

• You WIN from the increase in equity you build as you pay down your principal each month.

• You WIN from the appreciation that makes your property more valuable every month, as you add even more “free” equity to your real assets.

• You WIN from the tax advantages of owning property and from the fact that your rental income and sales profits are taxed at the lower capital gains and investment-income rate rather than at the rate of earned income – plus there are no payroll or self-employment taxes to chip away at your return.

With an investment in the JG Mellon Stabilized Real Estate Investment Fund you also win in more ways, too:

• Our team of financial experts carefully analyzes, researches, and discusses every property purchase to make sure that it fits the

The WELL-KNOWN coffee shops, salons, sandwich delis, pizza places, dry cleaners, and ice cream stores we see running successful businesses for years in the same strip mall locations also provide high rent, high return prospects.

strict guidelines we use to protect our investors and maximize their gain.

• You have a completely hands-off experience which brings you the best investments with only a small 1% management fee. You can earn and be confident that good decisions are being made on your behalf while you’re walking the golf course or sitting in your recliner watching Dancing with the Stars.

• And, by pooling your risk within our portfolio of top tenants and properties, you don’t have to worry about the downside of losing the single tenant in your own $5 million NNN investment. That would hardly be a blip in our evolving multi-million dollar plan.

An NNN lease is really a business, just like any investment property. But a REIT or the rental properties you buy yourself are managed by regular people, and they always run into unpredictable expenses. Our companies are managed by corporate giants and Fortune 500

CEOs, and there are no surprises or unexpected costs or worries. If you started your own soda pop company, but Coca Cola agreed to operate and manage it, paid you a guaranteed return, and required you to spend no time or money on the operation, would you consider that deal? That’s the nature of the triple-net lease. We sincerely hope that this report furthered your understanding and interest in this top-of-the-line real estate investment.

For more info or a prospectus,

call_____________________________________or

go to http://www__________.

This opportunity isn't for everyone. Check your eligibility to invest with us at www.JGMellon.com/Investing.



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