Net-Lease Risks that Lenders Consider: Interview with Gary Mozer

Net-lease investments are often compared to having the security and cash flow of a bond investment, but a lender sees greater risks.

The net-lease investment space today is a “big business,” said Gary Mozer, principal/managing director of George Smith Partners. The industry has become institutionalized in the past five years, with the entry of REITs and other large players.

As a lender, “I ask what is the tenant’s credit, and what is the type of lease—a bond, net or gross lease.” “How functional is the building? Is it a generic or specialty building? If a tenant vacates, the rent could fall with a new incoming tenant. These are the types of questions we have to ask.”

According to Mozer, more specialized buildings, such as a movie house or gym with a swimming pool, are less adaptable to different uses, and therefore may be less desirable as assets to lend into from the point of view of the financier. What type of industry the renter’s business is in, and the staying power of that industry, are also top considerations for the debt provider.

Although institutional players have entered the sector, there are still many private players for whom net lease properties remain an attractive investment. “Mom and Pops” are seeing the attraction of cash-on-cash returns of 6 percent, with the added benefit of tax shelters and depreciations, said Mozer.

But Mozer warned that net-lease investments may require more capital outlay compared to a simple bond investment. The small investor may think they are getting a 6 percent check every month. “But you also have to put money into the deal.” It is entirely conceivable that credit tenants may have their investment credits downgraded.

Many unsophisticated buyers in the market today are also not distinguishing between credit and non-credit tenants, added Mozer. If “the music stops,” the building owner would have to carry the building and insurance, tax and debt service of the property. Additionally, there would be tenant improvement costs and leasing commissions, he noted.

There are event risks that the lender looks out for and evaluates, said Mozer–for example the possibility of the tenant’s downsizing. “They may need 5,000 square feet today, but 20,000 feet tomorrow,” he concluded.