Net Leased Real Estate – The Time Is Now

By Marilyn Kane, CEO, Iridium Capital: In today's economy, investors adhere to a flight-to-quality mentality, seeking assets they deem secure delivering consistent returns.

Marilyn Kane CEO Iridium Capital LLPIn today’s economy, investors adhere to a flight-to-quality mentality, seeking assets they deem secure delivering consistent returns.  While historically, real estate is subject to periods of drastic price adjustments, net-leased real estate tends to weather these periods with far smaller variation.

Take costs, for instance. Owners of net leased real estate incur no increased expense when taxes, maintenance, or insurance costs rise, because in true triple net (NNN) leases, these expenses are paid entirely by the tenant. With NNN leases, investors can view net leased real estate like bonds rather than as traditional real estate with inherent variables.  Currently, net-leased corporate credit retail properties trade from a 5-7 percent cap rate, while industrial properties generally trade in the 8-9 percent cap range.  A primary benefit to the owner is that they have a credit-rated corporate tenant, and that corporations also guarantee the rent … a compelling story to investors looking to mitigate risk.

Net leased assets also exist in the medical sector, ranging from such large corporate medical users as DaVita and Fresenius to out-patient medical centers. Compared to retail, net-leased medical real estate tends to have low credit tenants, but usually pays higher returns

This picture is particularly attractive to individual investors looking at the dismal growth of IRA accounts held in traditional banking institutions. Investors, placing those monies with a custodian allowing the creation of a self-directed IRA account, permit allocation into such vehicles as funds investing in net-leased properties–those same properties with corporate rent guarantees. The opportunity to watch ones IRA move up from low single digits to even double-digit returns is well within the realm of NNN real estate investing.

Real estate traditionally has been a small part of institutional investors’ portfolios, as many pension funds and endowments aim for consistent returns to meet their financial obligations.  Increasingly, however, the credit backing of corporate net-leased real estate combined with its bond-like structure, creates an attractive investment opportunity that fills both credit and real estate mandates … and offers participants peace of mind.  The ability to moderately leverage these assets gives institutional investors the ability to increase yield with minimum additional risk.  As a result, they have begun to increase their exposure to net-lease properties through direct purchase and investment in net-lease funds and REITs.

As private companies seek new growth opportunities, many choose to enter into sale-leaseback transactions to raise necessary capital.  In this scenario, a private company, such as a manufacturer, sells its real estate and agrees to lease it back for a long term (10-20 years) on a net lease basis.  As the tenant, they now pay all real estate taxes, insurance, and maintenance, in addition to operating the building. And with this lease structure, there will be almost no changes in day-to-day operations, other than to whom rent is paid.

Beyond sale-lease backs, many national retailers use a net-lease structure to entice developers and investors to hold their real estate.  In exchange for lower-than-market rents, retailers agree to longer-term net leases (15-20 years).  This permits growing chains, such as Dollar General, to open more than 500 new stores a year without the burden of owning all the real estate.