Net Lease Development/Ownership: The deals are rinse and repeat and don’t require a ton of creativity. The yields are historically lower than some of the other #cre asset classes, but when looking at the asset from a stability standpoint, which one of these major retail tenants have a problem paying rent in a troubled market.
These tenants plus a few more are what comprise my net lease retail portfolio. They performed during the dot com bubble, during the Great Financial Crisis and they are still performing right now. Also as a bonus, most of them are on EFT payments. Rent shows up “automatically.” Net lease is an autopilot game, at least compared to other asset classes.
In other asset classes like office it is often hard to find a new tenant for a space and can take months of cash flow out of a project. When you acquire net lease it doesn’t matter if the tenant makes it. It is great when they do, but if they don’t there are far more users for your property than you can accommodate. I have been talking about the financial issues that Burger King has been having recently but I don't lose any sleep over it because it is so quick to re-tenant a nice net lease drive thru space like the ones they occupy. Their financial struggle just looks like lots of re-tenant opportunities for me.
That being said net lease properties also have pitfalls that other asset classes might not. The top mistake I see investors make in the net lease world is when they acquire properties that have rents much higher than what the market could/should support. As part of the acquisition process it is critical to get to know a good leasing broker. They are key to underwriting the deal and making sure the project will work if you need to re-tenant in the future.
As acquisition opportunities come to our team we keep a few things in mind:
1. Is this rent higher, lower or at current market rent for the property?
2. Is this an A+ location?
3. Will this building or lot generally function for other users/uses? (access, layout, etc.)
We also do a in-depth underwriting of the tenant to do our best to avoid the need to re-tenant the space in the near future. That being said, If we have a yes to each of these 3 questions than the property will never have a problem finding a new tenant to fill the space and start paying the same rate monthly.
Last bit of advice is to treat your brokers the best you possibly can! Flatter all the investment brokers. They bring you deals. The best ones track data better than any online service you can ever subscribe too. Kiss the butts of your leasing brokers. They drive the value for your building if you ever need to re-tenant. Brokers are the driving force of you team and should be treated as such.
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