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					            NET-LEASED (NNN) PROPERTIES
        The Real Estate Investment with the Features of a Corporate Bond

             By Jonathan S. Horn                  2. Industrial includes facilities used for
                                                      either distribution, manufacturing, or
Why are so many investors, foreign and                research and development.
domestic, placing their money in NNN              3. Office refers to any single user such
properties?                                           as an oil company or pharmaceutical
    Net-leased real estate provides a unique          firm occupying a facility as the sole
investment opportunity to individuals or              tenant.
institutions interested in owning real estate       Pricing on net-leased projects is based
without the hassles of management and           primarily on the tenant’s credit, the terms of
leasing typically found in conventional         the lease, and the location. Although each
real estate investments. Net-leased projects    of these variables has an important role in
are most commonly single-tenant, credit-        the pricing of net-leased projects, it is the
driven investments on long-term leases          combination of all three that will determine
which require minimal or no landlord            a true purchase price.
     As a result, investors are not bound to    Tenant’s Credit
their geographic markets, whereas they            • Many net-leased projects are based
would most likely be with a traditional real        solely on a tenant’s credit.
estate investment, not just closely watched       • Tenants considered investment grade
“backyard” opportunities.                           by a recognized rating agency usually
    A net-leased (NNN) property is effec-           trade at a premium (i.e. Walmart,
tively a long-term bond of a corporation in         Walgreens, General Motors).
the form of a lease document encompassed          • Tenants with junk bond (non-invest-
by real estate. The investment appears to           ment grade) ratings or minimal net
be a bond-type investment due to the                worth typically trade for a higher
“coupon-clipper” type of returns, 7%-15%.           return (i.e. UA Theaters, Dairy Mart
However, they also provide the added bene-          convenience stores, Taco Cabana
fits of tax reduction and property apprecia-        restaurants).
tion found in conventional real estate.
The net-leased investment can be                  • Length of a lease is a another primary
categorized three ways:                             factor in determining the sales price
  1. Retail refers to big-box users (i.e.           on a net-leased investment. Primary
     discount variety stores, department            terms of 15 or more years are pre
     stores, or home improvement stores)            ferred; 10 years is sufficient in 1031
     as well as small-box users (i.e. restau-       tax-deferred exchanges and similar
     rants or drug stores).                         cases
   • “Absolute” triple-net leases, where                  specifying a certain geographic
     the tenant is responsible for roof,                  location.
     structure, and parking, trade at a                 The combination of credit, lease and
     premium.                                       location can lead to paying a higher pre-
   • “Double-net (NN)” leases, where                mium (i.e. Walmart: 20 year absolute NNN,
     the landlord is responsible for roof           flat) or receiving a higher yield (i.e. CSK
     and structure, trade at a higher yield         Auto: 15 year NN).
     and usually include a reserve taken                The market for net-leased real estate
     for any potential repairs.                     investments is strong. The availability of
   • Leases with “bumps”- rental                    attractive financing combined with minimal
     increases or upside trade at a                 landlord responsibilities create highly
     premium, with the exception of flat            desirable opportunities, especially for
     leases with investment grade credit.           investors desiring a property for an IRS
                                                    Section 1031 tax-deferred exchange.
Location                                                Whether a risk-averse individual or
  • NNN leases are credit-driven, caus-             institution is in need of a smart deprecia-
    ing location to be the least impor -            tion vehicle or a relatively safe “coupon-
    tant factor.                                    clipper,” net-leased properties provide great
  • Investors often pay an added pre                investments in both credit and real estate
    mium for the residual benefit of                markets.

   For further information contact:

           Strategic Conversion of Real Estate to CapitalTM

             1108 Kane Concourse, Suite 201
             Bay Harbor Islands, Florida 33154
          305-864-2000 • 305-864-4240 (Fax) •

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