Debunking the Myth of Net Lease’s Simplicity
- May 17, 2017
I’m honored to currently serve and to have previously served as a mentor and sounding board to dozens of new people in the net lease industry. Those interested in the business or those just starting their net lease careers have run the age gamut; from undergraduate interns, new college graduates, change-of-career professionals to retirees that aren’t quite ready to completely leave the workforce. No the level of experience, before we speak to one another about the merits of a net lease property and establishing a career focused on the asset class, each one of them, without fail, has asked, “How do I get started?”
Laozi (Lao Tzu), the ancient Chinese philosopher, is famously quoted as saying, “The journey of a thousand miles begins with one step.” There is no better explanation to how one will begin their net lease career than to ensure one has a complete understanding that the path is filled with a tremendous amount of roadblocks and challenges.
Those not intimately involved in daily net lease transactions see the simplicity of the product type. They like that a net lease property is easy to explain, comes with minimal management and provides an income stream. But what they usually don’t understand are the inherit risks involved in developing, building, owning or brokering a single-tenant, net-lease investment. Developers are constantly balancing the timing of their projects and trying to forecast one to four years in the future when their property will be ready to bring to the market.
For example, I am part of a transaction that will be completed this summer in which the developer/seller signed the original lease in 2012, five years ago. It is just now fully stabilized and ready for a passive investor. Its safe to say that the market has drastically changed in that period of time, but the developer was willing to take the development risk by purchasing land, building a property and hiring endless contractors over those five years. Owners are always hoping their tenancy remains intact for the long term or, if there is an ultimate vacancy, that there is a clear, concise and expedient plan to “back-fill” that building with a new and better tenant—this is obviously easier said than done.
Lastly, brokers are always dealing with their commissioned-based positions, which means they don’t get paid until they actually perform their required duties. Starting as a broker may seem like a lower barrier-to-entry way to infiltrate the net lease industry, but early-in-their-career brokers should be ready to face some very lean years. Starting with the understanding that a new net lease broker doesn’t have any transactions to speak of, clients to fall back on, track record to tout, relationships in the industry or regular income, it should be clear that the simplicity of the business really isn’t that simple.
Net lease assets are true wealth builders, from both an ownership perspective and from the outlook of a net lease service provider. But there are dozens of people involved in the development, ownership and possible sale of any one net-lease investment, making transactions in the sector more complicated. Relationships must be built, experience must be garnered, failure must occur and risk must be taken.
The net lease industry is not simple, contrary to what most people believe when discussing the property type. With an estimated $2 trillion net lease market in the U.S., the industry should be complex, have risks and have failures. There is no secret on how to be productive within the net lease business. However, if you’re willing to take that first step, your journey will surely be interesting.
David Sobelman is the founder & CEO of Generation Income Properties (a public net lease REIT) and the managing partner of net lease brokerage firm Calkain Cos.