Finance Net Leasing
Dec 18, 2007
By: Dees Stribling, Contributing Correspondent
Like every other part of commercial real estate, the net lease business has been affected by the credit squeeze and all-around jitters about the health of the economy, but that doesn't mean that there still isn't room for growth in the business, or new opportunities offered by new ways of doing things. That was the conclusion of Commercial Property News' most recent interactive Webcast, "The Next New Real Estate Opportunity: The Secrets Behind Single-Tenant and Multi-Tenant Net Lease Transactions," sponsored by Spectrus Real Estate Group.
The on-line panel discussion, moderated by Elliot Markowitz, Editorial Director-Nielsen Web Seminars and Digital Events, and Suzann Silverman, Editor-in-Chief, CPN, covered the current state of the net lease business, in light of the unsettled state of other parts of the real estate business. "The single-tenant net lease market is an established billion-dollar industry," noted Markowitz, developing in recent years in a high-profile industry among real estate buyers, with the dominant properties typically either retail or industrial. Investors have been keen on net lease deals because these "types of properties can provide steady income, regardless of the condition of the economy or local real estate market," he noted.
"We certainly live in interesting times, especially for the residential market," said Silverman. "So where does that leave the net lease market?" For one thing, there's still opportunity for growth, since "only a small percentage of the huge corporate real estate pie has been net leased so far, so there's still plenty of room for this area to grow," she said.
Still, the subprime meltdown's impact has been far and wide, affecting the net lease business by imposing tighter lending standards and spurring rising cap rates, which are producing lower returns. Silverman, citing Real Capital Analytics figures, noted a recent drop in sales volume, though the total for 2007 will probably be up slightly over the previous year, because of high velocity earlier this year. But there's also an upside to current market conditions: commercial real estate fundamentals are still solid, holding on to the potential for increased rents in the future.
"The ability to go out and get financing is somewhat troublesome," said panelist Jonathan Hipp (pictured), President of Calkain Cos. "Widening spreads have impacted return on investment. But there still are a great number of buyers out there chasing opportunities. The current market gives the advantage to cash buyers."
Given current conditions, Hipp said that buyers should "buy sound, fundamental real estate -- a location on Main and Main, leased to a credit tenant, and in a market that has population and income growth." Not only will such net lease deals be intrinsically less risky, financing will be less difficult and costly, because lenders are looking for quality, too.
Panelist Robert Angelo, a real estate developer, spoke about his experience in the net lease market. "Net lease proved to be more of an exit strategy for us than anything else," he said. For many years, he was a developer of residential properties and then small commercial properties, but more recently his goal has been to move more into a situation in which he doesn't have to manage properties as much on a daily basis.
"A lot of people who've owned or managed property are in that situation," explained Angelo. Recently he bought, with Spectrus representing him, a multi-tenant retail property occupied by national and local tenants as part of a net lease deal. "We don't have anything against single-tenant properties, but our comfort zone has always been in multi-tenant properties," and it's the same for him in doing a net lease deal.
Angelo isn't the only buyer interested in multi-tenant net lease properties. On the whole, since peaking in 2005, net lease total sales volume has been down, and margins are continuing to tighten. As a result, many developers are starting to get into the multi-tenant net lease business, which is relatively new compared with single-tenant net lease.
Multi-tenant net leases are thus providing a new opportunity for real estate buyers looking for a higher return, a point stressed by panelist Peter A. Johnson, Executive Vice President of Spectrus Real Estate Group, which offers its new Net Lease PLUS program to help investors capitalize on the opportunities offered by multi-tenant net lease deals.
While some of the characteristics are the same as single-tenant net lease deals, multi-tenant lease deals do have some differences, including the length of the leases, who is responsible for paying the mortgage, and who controls more of the physical property. "Our Net Lease PLUS is basically a multi-tenant property, but structured with a master lease," Johnson said. "The master lease guarantees the investor a steady monthly return. That's how we turn a multi-tenant property into what looks like a single-tenant net lease property -- and in fact that allows us to do quite a bit larger properties."
Also, he noted, the master lease is cancelable, which is another level of protection for the owner. "If he decides to sell the property, he's not locked into a certain return, which obviously would affect the value of the property," Johnson said. "The owner can take advantage of increasing values, and sell the property." Many people use net lease structures for estate planning, Johnson added, and the Net Lease PLUS arrangement takes that into account as well, since the master lease is relatively easy for heirs to deal with.
Johnson concluded by saying, however, that multi-tenant net leases aren't always right for investors; single-tenant net leases can be just as good. "Investors need to look at all the factors -- you have to understand the location, the tenants, and so on," he said. "As a real estate owner, you absolutely have to do your due diligence."
By: Dees Stribling, Contributing Correspondent
Like every other part of commercial real estate, the net lease business has been affected by the credit squeeze and all-around jitters about the health of the economy, but that doesn't mean that there still isn't room for growth in the business, or new opportunities offered by new ways of doing things. That was the conclusion of Commercial Property News' most recent interactive Webcast, "The Next New Real Estate Opportunity: The Secrets Behind Single-Tenant and Multi-Tenant Net Lease Transactions," sponsored by Spectrus Real Estate Group. The on-line panel discussion, moderated by Elliot Markowitz, Editorial Director-Nielsen Web Seminars and Digital Events, and Suzann Silverman, Editor-in-Chief, CPN, covered the current state of the net lease business, in light of the unsettled state of other parts of the real estate business. "The single-tenant net lease market is an established billion-dollar industry," noted Markowitz, developing in recent years in a high-profile industry among real estate buyers, with the dominant properties typically either retail or industrial. Investors have been keen on net lease deals because these "types of properties can provide steady income, regardless of the condition of the economy or local real estate market," he noted.
"We certainly live in interesting times, especially for the residential market," said Silverman. "So where does that leave the net lease market?" For one thing, there's still opportunity for growth, since "only a small percentage of the huge corporate real estate pie has been net leased so far, so there's still plenty of room for this area to grow," she said.
Still, the subprime meltdown's impact has been far and wide, affecting the net lease business by imposing tighter lending standards and spurring rising cap rates, which are producing lower returns. Silverman, citing Real Capital Analytics figures, noted a recent drop in sales volume, though the total for 2007 will probably be up slightly over the previous year, because of high velocity earlier this year. But there's also an upside to current market conditions: commercial real estate fundamentals are still solid, holding on to the potential for increased rents in the future.
"The ability to go out and get financing is somewhat troublesome," said panelist Jonathan Hipp (pictured), President of Calkain Cos. "Widening spreads have impacted return on investment. But there still are a great number of buyers out there chasing opportunities. The current market gives the advantage to cash buyers."
Given current conditions, Hipp said that buyers should "buy sound, fundamental real estate -- a location on Main and Main, leased to a credit tenant, and in a market that has population and income growth." Not only will such net lease deals be intrinsically less risky, financing will be less difficult and costly, because lenders are looking for quality, too.
Panelist Robert Angelo, a real estate developer, spoke about his experience in the net lease market. "Net lease proved to be more of an exit strategy for us than anything else," he said. For many years, he was a developer of residential properties and then small commercial properties, but more recently his goal has been to move more into a situation in which he doesn't have to manage properties as much on a daily basis.
"A lot of people who've owned or managed property are in that situation," explained Angelo. Recently he bought, with Spectrus representing him, a multi-tenant retail property occupied by national and local tenants as part of a net lease deal. "We don't have anything against single-tenant properties, but our comfort zone has always been in multi-tenant properties," and it's the same for him in doing a net lease deal.
Angelo isn't the only buyer interested in multi-tenant net lease properties. On the whole, since peaking in 2005, net lease total sales volume has been down, and margins are continuing to tighten. As a result, many developers are starting to get into the multi-tenant net lease business, which is relatively new compared with single-tenant net lease.
Multi-tenant net leases are thus providing a new opportunity for real estate buyers looking for a higher return, a point stressed by panelist Peter A. Johnson, Executive Vice President of Spectrus Real Estate Group, which offers its new Net Lease PLUS program to help investors capitalize on the opportunities offered by multi-tenant net lease deals.
While some of the characteristics are the same as single-tenant net lease deals, multi-tenant lease deals do have some differences, including the length of the leases, who is responsible for paying the mortgage, and who controls more of the physical property. "Our Net Lease PLUS is basically a multi-tenant property, but structured with a master lease," Johnson said. "The master lease guarantees the investor a steady monthly return. That's how we turn a multi-tenant property into what looks like a single-tenant net lease property -- and in fact that allows us to do quite a bit larger properties."
Also, he noted, the master lease is cancelable, which is another level of protection for the owner. "If he decides to sell the property, he's not locked into a certain return, which obviously would affect the value of the property," Johnson said. "The owner can take advantage of increasing values, and sell the property." Many people use net lease structures for estate planning, Johnson added, and the Net Lease PLUS arrangement takes that into account as well, since the master lease is relatively easy for heirs to deal with.
Johnson concluded by saying, however, that multi-tenant net leases aren't always right for investors; single-tenant net leases can be just as good. "Investors need to look at all the factors -- you have to understand the location, the tenants, and so on," he said. "As a real estate owner, you absolutely have to do your due diligence."
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