Net-lease real estate is one of the more cookie-cutter sectors of the industry for investors. The owner of a net-leased asset essentially has an agreement (lease) in place with a tenant that shifts responsibilities that are typically held by the landlord over to the tenant. The tenant, often a restaurant, convenience store, or pharmacy, would be required to pay for the property’s taxes, and repair the roof when it leaks. Owning the building is not quite as passive as owning shares of a public company’s stock, but as long as there is a financially stable tenant on a long term lease, it’s relatively worry-free.
This stable, passive-type real estate investment therefore trades on a fairly predictable yield, or cap rate. Brokers across the net-lease space have a good handle on fair prices as a multiple of the Net Operating Income if they deal regularly with these transactions.
This predictability is driving newer websites and tech platforms that want to help potential buyers of these properties gain the same level of visibility as brokers. One of those new sites is NetLeaseFinder.com, founded by a long-time net lease broker.
Chris: By way of background, I spent the beginning of my career on Wall Street and got exposure to real estate through working as an analyst on a healthcare M&A desk. After trading fixed income at Wells Fargo in Beverly Hills, CA, I transitioned into a private equity group that was syndicating single tenant net lease assets. Syndication was a great learning curve which highlighted all the areas of the commercial real estate business model from acquisitions, syndication, 1031 exchange advisory, syndication, asset management and disposition.
Chris: In order to understand what makes a “good” investment one must understand the benchmarks, the 10-year US treasury historically has traded approximately at 4% and the 100-year return of the stock market is 9–10% before taxes. Single tenant net lease investments can offer competitive returns above the risk- free bench mark and in some cases can outperform the stock market without the volatility.
Coming out of a background in trading corporate and municipal bonds, and observing investor sentiment post 2008, I discovered that the wealthiest, most prudent, and arguably most successful investors were no longer looking to realize big capital gains on short term investment horizons. Instead, they preferred assets that generate consistent long-term income with scheduled rent increases to protect principal in the most tax-efficient manner possible. Single-tenant net lease investments offer investors investment grade credit, long term income with rent increases, and tax-efficient features such as depreciation, management write-offs and mortgage deductions increasing the taxable equivalent yield for investors in higher tax brackets.
Chris: In 2018, the single tenant net lease space is experiencing a paradigm shift with interest rates rising leading to a mismatch between buyer and seller expectations. For the last decade world economies have enjoyed historically low interest rates (10-year treasury was at 2.48% in January), but today the index is trading over 3%, expecting to close the year out around 3.25%. Sellers have enjoyed cap rate compression for the better part of the decade, with interest rates spiking, buyers are being faced with negative carry trades when borrowing at ~5.50% on 10-year paper while sellers still expect to be able to sell at sub 6% cap rates.
Chris: After working with 1031 exchange buyers and fixed income investors for over a decade it was clear to me that intelligent, successful, accredited investors do not want to be “sold a deal”; they want all of the information available in order to make informed and actionable decisions.
Chris: Netleasefinder.com is going to evolve to offer more comprehensive single tenant data, real time property updates, and a more dynamic user experience for principals, brokers, and third party service providers.