Why buy a property leased to the U.S. Postal Service?
One of the main advantages of buying a post office is that you are purchasing the property "fee simple", meaning that you own the land and the building, but are also buying the rights as the landlord to take over the lease with the U.S. Postal Service ("USPS") as the tenant.
The USPS has "leasehold rights" and, because they are the ones that have drawn up the leases, they tend to favor the postal service. However, having the USPS as a tenant means the rent is backed by the U.S. government, which provides valuable safety to your investment.
Safety: The United States federal government guarantees the rental income, providing exceptional security on your investment.
Availability: Only about 25% of all postal facilities in the U.S. are owned by the United States Postal Service. The remaining 75% are privately owned and leased to the USPS.
High Returns: Even though the income is guaranteed by the U.S. Government, you could achieve extraordinary returns of 8-30+%. However, all investments are subject to risk of loss.
Standardization: Almost all leases are on United States Postal Service forms, so once you familiarize yourself with the terms, it is extremely easy to pick and choose which properties fit your investment parameters and needs.
Diversification: You can purchase small postal units around the country with different features to diversify your investments.
Flexibility: Purchase prices range from a few thousand dollars to several million dollars, so there are opportunities to fit every investor's budget.
Tangibility: Own something tangible - a building and land - that will always have some value, rather than a piece of paper.
Tax Advantages: You do not have to pay capital gains taxes on profits from the sale of real estate, provided that you re-invest those profits into other "like-kind" real estate within a certain period of time.
Rental Income: Rental income collected from tenants may cover your mortgage costs, insurance, and maintenance upkeep.
FAQs
What happens to my post office when the lease terms expire?
In the overwhelming majority (99%+) of cases, the USPS will renew the post office's lease once it expires. However, in the very rare case that a post office becomes vacant, it is typically easily retro-fitted to be a professional office (law office, accounting office, etc.) with very high rents. This is because the buildings are built to extremely strict postal service specifications, which can cost ~$200+/- per square foot to build (compared to regular commercial buildings which typically cost $30-$40 per square foot). Some post offices have even become banks after lease terminations due of the solidity of the structure and the loading docks.
Why is JLL or CBRE contacting me?
In 2011, the US Postal Service agreed to hire CB Richard Ellis as their exclusive real estate broker, representing them in certain lease negotiations and sales of postal service-owned facilities. Several years later, they shifted this agreement to JLL. Through an exclusive arrangement, the postal service pays this brokerage for their services (~3% fees). However, this does not stop them from attempting to collect commissions from landlords of 3-5% on the gross value of the leases and lease options. No landlord is obligated under the agreement to pay any commission to any brokerage firm.
What should I do if they want to charge me a commission?
This is really simple. Refuse to pay them a commission. Call us at 1.800.393.2761 if you need help.
What do you think is the "right" location for purchasing a post office?
Location depends on personal preference and investment objectives. Many investors prefer post offices in larger cities where there is a higher residual value because, should the building become vacant, it is typically easier to rent to someone else. However, on the negative side, the postal service can more easily consolidate and close these urban post offices when there are numerous others nearby. So, many other investors prefer rural locations where the postal service has much more limited ability to close or consolidate a local post office.
How do you determine the net operating income (NOI)?
When there is no maintenance rider, subtract $1.00 per square foot on average from the rent. If there is no tax rider, simply subtract the annual property taxes. Subtract the property and liability insurance.
What are the capitalization rates (CAP rates) for post office investments?
Generally speaking, CAP rates reflect the investor's rate of return on a percentage basis. Over 30 years, CAP rates have varied for numerous reasons. Some years, they were affected by the national economy and inflation rates. In other years, the supply and demand for owning USPS leased facilities would be weak or strong depending on things like the difficulty of negotiating with CBRE.
What do you consider the biggest risks when investing in post offices?
We find that investors often overpay for their post office investments. In these cases, the rental rate is probably either higher than market and will be reduced upon the next lease/option renewal or the landlord's rate of return will drop dramatically. I also find that many investors in leased post offices never take into account that postal rents are flat for 5,10,15, or even 20 years and do not account for CPI or COL rate increases. Also, by not belonging to a membership association like APO, purchasers of post offices often do not know how to find comparable rents, comparable terms, and average cap rates that post offices are selling for.
What do you consider the biggest benefit to investing in post offices over other commercial real estate properties?
The postal service is still a quasi-governmental agency which retains many of the rights of the federal government, such as eminent domain. Therefore, one of the biggest advantages is that the federal government will not let the postal service go broke, so your rental income is effectively federally guaranteed. Considering that the rent is guaranteed and the return on your investment should be at a minimum of 8-10% all the way up to 15-20%, there is absolutely no comparison to traditional commercial real estate properties. Note: All investments are subject to risk of loss.
Should I be concerned about post office closures?
In 2007, the US Postal Service announced that they would be closing a large number of post offices, but after substantial push-back from Congress, they made an agreement to cease closures. However, the USPS continued to find workarounds such as reducing hours or closing on Saturdays, which often caused postmasters to quit (which allowed the USPS to replace them with older retired people at significantly reduced wages). They are also occasionally using the excuse of exorbitant rents to force some post offices into suspension or closure. In these instances, owners may appeal the Postal Regulatory Commission (PRC) if they are unfairly treated (and in most cases, the owners win). Prior to 2007, 200-300 of the 25,000 leased facilities in the U.S. would typically close each year due to bad conditions, asbestos, etc. Even now, only ~2% of post offices are suspended or closed each year. So the risk of closure or suspension is fairly small, but it is higher in urban areas with multiple post offices where the postal service can indiscriminately close any facilities they want.