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Clay & Company is a Houston-based commercial real estate brokerage, investment, and auction company serving the needs of governmental agencies, financial institutions, insurance companies, and individuals 
throughout the State of T

Our regularly updated blog covers local and national news, events, and happenings affecting Texas and the commercial real estate industry.

Category Archives: Triple-Net Investments

Net-lease Trends

Screen Shot 2012-08-09 at 2.51.12 PMThe entire net lease market has seen compressing cap rates. The combination of multiple factors has led to this declining cap rate environment. First, we have seen that low interest rates and a low yield investment environment has impacted cap rates. Because cheap debt is available and the risk free investment returns are so low, investors are able to pay premuims (lower cap rates) for net lease assets and still achieve a spread that is appealing in today’s market.

There is limited net inventory availble due to the fact that retail slowed their expansion and growth plans since 2008. Coupled with a flight to quality by investors the simple fundamentals of supply and demand are driving cap rates lower.

Via here and here.


Net-Leased Cap Rates Report

Capitalization rates for single-tenant net-leased retail properties declined in 2Q12, according to The Boulder Group’s 2Q12 Net Lease Market Report. In contrast, cap rates for office and industrial properties rose slightly, according to the report.

Restrained development and an abundance of available capital for these assets have contributed to continued cap rate compression in the retail sector. Tenants seeking reduced rents are backfilling existing space, such as vacated Borders locations, further hindering the sector’s supply, according to the report. Cap rates are likely to continue moving downward as many national retailers curtail expansion plans.

Available financing and stable cash flows are expected to fuel transaction volume in the overall national single-tenant net-leased market. Institutional and private investors are drawn to the sector’s stability, and core assets with investment-grade tenants will continue to be in high demand, according to the report.

Screen Shot 2012-07-19 at 10.14.20 AM

Source: The Boulder Group via CCIM


401(k), 403(b) and 457 Plans Increasing Their Use of REITs

For decades, pension plans have been using real estate including REITs within their investment portfolios. This is because like academics, including Nobel Prize winning economists such as Harry Markowitz, as well as investment experts, pension plans consider real estate a fundamental asset class.

  • “Basically, there are only four types of investment categories that you need to consider: Cash, Bonds, Common Stocks and Real Estate.” – Burton G. Malkiel (Princeton), The Random Walk Guide to Investing
  • “Real estate is not an alternative to stocks and bonds—it is a fundamental asset class that should be included within every diversified portfolio. Equity, fixed income, cash, and real estate…are the basic asset classes that must be held within a diversified portfolio.” – Robert M. Doroghazi, The Physician’s Guide to Investing
  • David Swensen, Yale University’s Chief Investment Officer (Unconventional Success, 2005) recommends a “basic formula” for individual investors with 20 percent invested specifically in REITs and the rest in equities, bonds and cash (TIPS).

In fact, industry data from sources such as the Pension Real Estate Association (PREA) and Pensions and Investments magazine show that, on average, pension plans have been increasing their real estate investments in real estate equity since 2000 and that a significant percentage (40 percent) plan to increase their allocations going forward.

The defined contribution world, which includes 401(k), 403(b) and 457 plans, is rapidly catching up with the defined benefit world in terms of the use of real estate, and particularly REITs. There are number of reasons why defined contribution plans are currently behind. The main one is that at the time these plans were taking off in the 1980s, there was not a simple way to provide participants access to a real estate investment option. Back then, the REIT market did not yet have sufficient size and liquidity to permit defined contribution plans to implement a REIT option. This has all changed in the past 20 years, in what is referred to as the “modern REIT era.” Now the REIT market offers a liquidity pool deep enough for the largest of pension and defined contribution plans.

In terms of investments, the most significant trend in the defined contribution industry is associated with asset allocation products such as age-based (e.g., target date, life cycle), risk-based (lifestyle) funds and managed accounts. Due to the enactment of the Pension Protection Act of 2006 as well as other factors, industry experts believe that it is not inconceivable that within the next decade, a vast majority of the assets within the defined contribution market will be invested in these types of products.

The question is: How do REITs fit into this new paradigm? The good news is they fit in very well. In fact, it’s been the buzz in the DC industry. An example of the buzz is a study called “Popping the Hood: An Analysis of Target-Date Fund Families.” This study analyzes target-date funds and is considered by some to be the definitive source of information on these funds. The study indicates that it covers over 90 percent of the assets in the target-date fund market. One of its key findings was that many target-date fund products are too simplistic in their asset allocation – some use only use stocks, bonds and cash. The study recognizes the importance of using additional asset classes and specifically cites REITs and the diversification benefits they provide.

Different organizations in the defined contribution industry have focused on the different benefits of REITs. For example, some have focused on diversification and others on inflation-protection. However, the fact is that more and more providers and plan sponsors are including REITs in their asset allocation products in the defined contribution plan marketplace. Whereas less than a year ago only a few asset allocation products included real estate/REIT exposure, now it appears that a majority do. This trend is expected to continue.



Getting the Best Piece of the Pie

By Carrie Rossenfeld for Real Estate Forum

Screen Shot 2012-04-26 at 12.03.31 PMIt’s no secret that the net lease market is attracting many investors, new and veteran, seeking a safe sector for their portfolios. While there’s no sure thing in the investment realm, net lease does have its pluses, including long-term tenants assuring a steady income stream. But with so many players in the market looking for a great deal, how can savvy investors stay ahead of the pack and land the best net lease transactions? Real Estate Forum spoke with several industry experts to get their take on the net lease market and how to make smart choices when making acquisition decisions.

“Things are getting competitive,” says Jason Fox, managing director and co-head of domestic investments with W. P. Carey in New York City. “We have a low-interest rate environment and despite aggressive pricing, it’s inducing a lot of sales. A lot of users are considering sale-leasebacks, and private-equity firms are considering them for their portfolio companies as a way to access capital to finance growth and expansion.”

On the flip side, Fox adds, the market is also competitive for investors. Property yields have been driven down, and pricing that resembles 2007 is emerging. “There are good opportunities, though,” he says, “in a range of asset classes including retail and restaurants, despite the aggressive bidding out there. The good news compared to 2007 is that you’re still able to generate appropriate risk-adjusted rates of return for this type of investment, given the spreads between property yields and lending rates.”

Brandon Duff, director of the Chicago office for Stan Johnson Co., says staying educated about the market is key to remaining ahead of the competition: “Look for both good and bad. It’s also important to understand the debt markets and how they impact pricing.”

Knowing which market you want to be in is part of the education process, and it’s vital for net lease transactions. “You need to be an expert in the market you’re focused on,” says Nicholas Schorsch, chairman and CEO of American Realty Capital in New York City. “For example, if you’re looking for long-term income in net lease space, do you want to buy industrial, retail or office? There are different types of net leases like there are different types of restaurants.”

Schorsch, who also spoke at a recent RealShare Net Lease conference in New York City, believes that building a homogenous portfolio is key. “If all of the assets are in retail, it’s easier to sell it because you create more value,” he explains. “You want to be sector-specific, location-strategic and stay within your discipline. A lot of investors make a huge mistake by buying a variety of asset classes in a lot of different markets and end up with a mediocre portfolio that’s not well diversified. In net leases, it matters when you create aggregation value; you’re creating a mini portfolio.”

On the other hand, United Trust Fund aims to mitigate the risk of uncertain credit by diversifying the spectrum of companies with which it does business. “In the current economic climate, capital is expensive,” another RealShare speaker, Paul Domb,VP of asset management with Miami-based UTF, tells Forum. “This has resulted in a slew of sub-investment grade or dubious credits that do not have access to the capital markets and are now turning to sale-leasebacks. When you have a market where the credit quality has deteriorated, you must take a closer look at the real estate component. Both credit and real estate are the main considerations in a sale leaseback, and where one is lacking, you must look at the other.”

This strategy has worked for UTF: in its 40 years in business, the company has developed many long-term, repeat sale-leaseback clients. “It sounds simple,” comments Domb, “but in a dog-eat-dog market, the message is to keep your existing and prospective clients informed of your capabilities.”

For investors, having an optimal source of financing lined up that will enable them to maximize their yield gives them confidence to push pricing if they’re in a competitive situation, says Guy Ponticiello, Chicago-based managing director of Jones Lang LaSalle and leader of the firm’s corporate finance and net lease team. “Whether that’s five- or 10-year money— whatever the debt structure is that’s in line with the hold objective of the buyer—their ability to take advantage of some very cheap debt will keep them ahead of the pack,” he notes. “Some investors buy with the notion that they’re going to finance the acquisition at some level, but they may not have the structure figured out yet. The more investors can figure out available debt options and partner with a reliable debt source or intermediary mortgage broker, the better off they’ll be.”

Ponticiello is also founder of the new JLL Net Lease Exchange website, which is dedicated to the sale of triple-net leased single-tenant properties on behalf of occupiers, developers and investors. The site connects the sellers to JLL’s global buyer network through an exclusive inventory of properties of all types and sizes, combined with sophisticated transaction tools. JLL’s recognition of the net-lease market’s volatility is what drove the site’s creation.

In such a volatile environment, having a debt strategy is crucial, whether you’re a small “mom and pop” exchanging into net lease investment or a seasoned institutional investor, says Bill Rose, director of Marcus & Millichap’s national retail group in San Diego. “There’s no shortage of capital to finance net lease properties,” he says. “Five-year money can be obtained in the low-4% range. The question is how to reload that debt at that maturity. For other investors who are looking at fully amortizing zero-cash-flow bond financing, Triple-B or better-rated tenants afford free-and-clear ownership of the property upon maturity.” The private investor, while accounting for 80% of transactions of this size, is competing increasingly against institutional investors.

Financing is still the most difficult piece of the capital stack, particularly with more challenged credits or assets in secondary or tertiary markets, Ponticiello adds. “What someone thinks should be a fairly straight- forward transaction to get financed in this market can present a whole host of issues.”

In addition, for well-sought-after single-tenant transactions, many investors are differentiating themselves by putting up non-refundable earnest-money deposits or closing in very quick timeframes. “Given the still-fragile nature of the economy, certainty of closing is right up there with price as the most important criteria on which sellers base their decisions; that will help them bid better than others,” Ponticiello explains. “If I can get five-year money going into a deal, let’s say at 3.5% or 3.75%, and my hold strategy is five years, I can get a low-6% cap. But I can do that only if I feel confident that I can get that debt.”

Actual knowledge about the tenant and a broad view of the sector are key tools, and it’s helpful to have some debt in place. “The debt is clearly a factor on both large and small transactions, and it’s magnified on transactions that are larger than $10 million,” Ponticiello points out.

Some say that taking on more risk is one way to stay in front of the pack, but be sure it is managed risk and not simply outside the box for diversification’s sake. “The net lease market is really an opportunity to stabilize an income stream,” says Al Pontius, managing director of Encino, CA-based Marcus & Millichap’s national office and industrial properties group. “The way to enhance return is to move a little further out on the risk spectrum. I’m not talking about zero credit combined with a tertiary location— I’m talking about managed risk.”

Pontius explains that many active and professional investors buying large volumes of net lease assets on a regular basis believe that the lease term has to be 10 years or greater—even 15 years or more, for some— but this rule doesn’t necessarily apply. “If you want to beat the market and take what many investors would perceive to be a higher degree of risk,” he says, “look at non- major-metro locations, lower credit quality and shorter lease terms. When offered at an attractive cost basis, these investments can minimize the downside risk while allowing for higher going-in yields. And if the lease can be renewed, you can continue to have a great long-term investment, but you didn’t have the 15-year rate up front.”

There are many factors to be aware of with net lease transactions, including understanding that, in the end, these assets are still real estate. “It sounds remedial, but too many times net lease properties are described as bonds, or simply fixed-income assets,” says Duff. “While there’s truth to that, it is still important to understand real estate fundamentals and what to look for when acquiring commercial property.”

Also remember that the value of a real estate asset to an investor is its ability to produce cash flow. “You want to focus on maximizing cash flow on a risk-adjusted basis from individual assets and from your aggregate portfolio,” RealShare speaker Ben Butcher, president and CEO of STAG Industrial in Boston, tells Real Estate Forum. “You have to be cognizant of the things that affect cash flow for a particular asset going forward: a combination of underlying tenant credit and underlying real estate quality and value.”

He also cautions against being overly cautious regarding the risks associated with tenant credit. Viewing the world as black and white and drawing lines in the sand regarding what you’ll invest in can limit you unnecessarily. “The world is shades of gray,” says Butcher. “We substitute analysis for decision rules and look to understand these shades of gray that are the basis for our probability-based under- writing model. A primary market is not ‘good,’ and a secondary market is not ‘bad’—they’re just different.”

Pontius, like many other industry experts, also believes in diversification. “Investors may want to look at how much of the portfolio is comprised of one par- ticular credit, and they may not want to have more than 25% composition. Look for expiration terms that vary. Renewals are likely to happen in a very high percent- age of the assets, and that benefits a diversified portfolio.” The importance of conducting full diligence on every tenant cannot be overem- phasized. “Circuit City was a solid investment 10 years ago, and we saw that change,” says Rose. “You have to like the tenant and have good cash flow, but more importantly, you have to love the real estate. If the tenant goes dark, what am I going to do with the property? You need to go into the deal with eyes wide open and conduct your due diligence before you close.”

Schorsch suggests developing direct relationships with brokers and giving them the exact criteria of what you’re seeking so that they connect you with the right opportuni- ties. “You have to be careful about how broad a fishing net you put out.”

Also, be aware and wary of who is paying you rent for the entire lease term, Domb cautions. “Highly leveraged companies, a pattern of no net income, declining reve- nues, letters of credit tied to the income stream are usually red flags,” he relates. “Corporations today are asking for and obtaining shorter lease terms.”

In the past, investors have been bailed out with a low cap-rate environment such as the current one, given where borrowing costs and underlying treasuries are. “In today’s market, you need to rely on long-term holds and look at the fundamentals,” says Fox. “Are you at the right basis for the property? Is it a good, growing market with deep supply? Is the cost less than replacement cost?”

All of these factors, he points out, will protect investors in maintaining yield on the downside. It won’t do to rely on lower cap rates and asset appreciation anymore; these days, the bulk of the return is based on basic fundamentals and in-place income. ◆


Net Lease Cap Rates Increase in Retail Sector

via Newscenter

Single-tenant net leased retail property capitalization rates experienced a 3 basis-point increase from 4Q11 to 1Q12, according to the Boulder Group’s 1Q12 Net Lease Market Report. Over the same time period, office and industrial net leased property cap rates compressed 15 and 6 basis points, respectively.

The retail cap rate increase is the result of lower quality assets entering the market. The report attributes the influx of lower quality assets — those with non-credit tenants and short-term leases as well as those in secondary markets — to opportunistic investors who are taking advantage of the increased demand and low cap rates in the net lease sector. Although transaction volume for single-tenant net lease properties remains high, investors expect it to cool off as interest rates rise.

Within the retail sector, not all cap rates rose in 1Q12. Cap rates for banks, CVS/Walgreens, and GSA-occupied properties compressed 15, 30, and 23 points respectively. According to the report, these properties “will remain attractive to investors because of the wide availability of credit tenant lease financing for these assets.”


Net Leases Hit Record High in 2011. Can 2012 Keep the Magic?

From Commercial Property Executive
By Nicholas Ziegler, News Editor

Along with multi-family, could the net-lease sector be the next big winner in 2012?

Single-tenant net-lease property sales hit a record in 2011, averaging more than 10,000 transactions per quarter, according to a January 2012 report by CapLease, a REIT that specializes in net-lease transactions. Sales volume in the first three quarters of last year exceeded $29 billion, while total year-end volume was estimated to reach nearly $38 billion.

“Low interest rates, economic uncertainty and volatile equity markets will keep the single- tenant net-lease market one of the hottest CRE markets in 2012,” the report noted. “There is certainly a lot of money out there,” Randolph Mason, CCIM, SIOR and a partner with Commercial Realty Specialists, told Commercial Property Executive. “Depending on the tenant mix, (net leases) are absolutely a safe investment because of the lack of volatility.”

Cap rates for the sector continue to compress. According to data firm Real Capital Analytics Inc., average cap rates for single-tenant assets dropped from 7.7 percent at the beginning of 2011 to 7.5 by the third quarter. Comparatively, the average cap rate in 2010 was 7.9 percent. The Boulder Group, a research firm specializing in net-lease transactions, found a similar trend. A fourth-quarter report by the firm found that “the national single-tenant net-lease market transaction volume should remain active due to the stability and financing availability of this asset class.” Additionally, a majority of the firm’s clients are expecting 2012 transaction volume to increase between 5 and 14 percent from 2011 levels—with core assets from investment-grade tenants remaining in the highest demand.

And it is those investment-grade tenants that are making the big moves of late. In a $45 million, triple-net-lease transaction in late December, Jones Lang LaSalle Inc. orchestrated a sale of one of toymaker Mattel Inc.’s design offices from Kilroy Realty Corp. to a vehicle of Angelo, Gordon & Co.—just after the tenant signed a new, 15-year lease.

“Investors are targeting those long-term leases, both from a real estate standpoint and a financial standpoint,” explained Bob Prendergast, a managing director with Jones Lang LaSalle. “Mattel was a high-credit tenant and, based on tenant credit, investors can get high leverage.”

But the real issue is finding the funding. “Bankers have told me that they’re willing to lend money, but getting through government regulations is difficult,” Mason said. “So you’re seeing investors paying all cash or getting very low-leverage ratios.” The result? “A larger number of small transactions, as well as some portfolio transactions by larger buyers, such as pension funds, who have the cash.”

The Boulder Group’s analysis found that, as with Mason’s clients, investors have been challenged to look at their acquisition criteria. Since supplies of investment-grade properties continue to fall, cap rates for well-located, high-quality assets continued to compress much further than the market as a whole. “This can be best illustrated by McDonald’s and Walgreens cap rates compressing by 23 and 25 basis points, respectively, in the fourth quarter,” the firm noted. “In contrast … the overall net-lease retail sector decreased by only three basis points.”

So the stage for net lease is set in 2012, but with a few extra twists from the previous year. While there are still deals to be found, it remains to be seen if investors decide to sign up for the ride once again.


Defining the type of investor you are…


Investing in commercial real estate is a great way to generate wealth producing relatively consistent returns through monthly income or capital growth

Real estate returns are generated in two ways: income return and capital returns. The income returns comes from tenants’ rent payments and the cash that remains after all property expenses have been paid. Capital returns are the increase or decrease in the value of the property due to changes in market demand and/or inflation.

The first steps to investing in commercial real estate is to ask yourself why you want to invest in real estate and to define what type of investor you want to be. What kinds of returns are important to you?

An investor that is interested in income return, or stable cash flow, purchases a property that can provide a monthly income. The income return from real estate is directly linked to the rent payments received from tenants, minus the costs of operating the property and outgoing mortgage/financing payments. Analyzing this type of property has been likened to the analysis you may do if you were to buy a business. This means thoroughly examining the financial records of the property to prove it could stand on is own each month. Also important is the property’s ability to stay leased so that these financials remain.

When investing in a single-tenant office or industrial building this may mean you evaluate the current tenant more completely to be sure they intend to and can afford to continue leasing the building. For a multi-unit property, the strength of the leasing market and competitive rates of the property are more important.

One of our clients that favors triple-net investments recently reviewed the real estate deals he had participated in over the past couple of years. He found he was getting 9.4% return on cash and pointed out that the internal rate of return was even greater in that you are also reducing debt.

Sign photo 2

Unlike cash-flow investors, long-term or “hold” investors rely on capital returns through real estate appreciation to build their wealth. Capital appreciation of a property is determined by whether or not your property would sell for more than you bought it for. If so, then you’ve achieved a positive capital return. These investors rely on the simple strategy of patience. They look for real estate that will appreciate over time because of location, market changes, or inflation, or deals that provide an upside by offering the ability to increase cash flow or update the property.

The capital return is more difficult to calculate, and requires the property to be valued or appraised. The majority of the volatility in real estate returns comes from the capital appreciation component of returns. Income returns tend to be fairly stable. Capital returns fluctuate more and although this tactic can be riskier, many times the return is greater.

While you are out in your city, start looking at the real estate you see – from the retail center at the corner to the industrial building by your office to the vacant land by your house. Is the shopping center fully leased? What kinds of tenants occupy the buildings? An investor owns every one of these commercial properties.


People are talking about…



In Case you Missed it: Investing in Triple-Net Properties: Now Is the Time

Investing in Triple-Net Properties: Now Is the Time
By Randolph T. Mason
Senior Vice President & Partner, Lee & Associates Commercial Real Estate Services
Original article here. Reprinted by REDNews here.

If you could have an investment that paid you regularly with limited management, would that excite you?

If so, the long-term triple-net-leased property to a sound company with good financials (and maybe even personal guaranties or letters of credit) may be an investment for you.

One of the exciting components of a triple-net investment is that the tenant is the one who maintains the property and typically pays all of the building’s expenses. You, as the owner, receive your rent. Should you have any debt service on the building, this rental income goes to pay that expense. The balance is for you.

Let’s look at what’s currently happening in the market. Cap rates seem to be stable, or possibly shifting downward slightly, on most types of properties. Some of the lowest cap rates are apartments, followed by central-business-district office projects, R&D industrial, neighborhood retail and industrial properties. Some of the favorite triple-net properties are, not surprisingly, those that seem to offer the least risk – such as Wal-Mart, McDonald’s, Lowe’s, Walgreens and other high-profile tenants. Should an investor be looking for a higher return on their investment, they should probably look at lesser known, yet well capitalized companies.

While long-term triple-net investments provide stability and income, there is a downside. Your assets are locked into a long-term lease, and you’ll miss out on chances to capture any gains in rental income when fundamentals improve.

But there still seems to be a strong supply of debt available due to long-term leases to credit tenants, a trend strengthened by the ease of underwriting for single-tenant properties. We are still seeing institutional investors, REITs and foreign buyers, as well as private investors, investing in all-cash transactions; currently, they have nowhere else to put their money and achieve a decent return.

So, investors looking for limited management responsibilities, longer-term leases with a stable cash flow and the unique tax benefits from real estate, a triple-net investment may be the right play.

Clay & Co Note: See a recent example of this type of investment here or read more triple-net leased investments articles.


Triple-Net Triple Threat

Investors vie for the safety, convenience, and ROI of top net-leased deals.
By Sara Drummond for
Commercial Real Estate Investment, The Magazine of the CCIM Institute

Looking for a rock-solid investment in a shifting economy?

Look no further than single-tenant net-leased properties. In markets where shopping centers sit empty and office buildings are dark, the lights are on (usually 24 hours) at the corner drugstore — provided it’s a Walgreens or a CVS. With their invest- ment-grade credit ratings and penchant for long-term leases, these drugstore triple net- leased deals attract top dollar in almost every market.

NNN Quote

But drugstores are only one of a stable of creditworthy tenants for net-leased deals, according to a recent anecdotal survey of CCIMs. Other tenants are also attracting buyers. CCIMs report that everyone from all-cash individual buyers in small towns to big-city real estate investment trusts are looking to add one, two, or 20 of these stable investments to their portfolios.

From every U.S. region, CCIMs report that the NNN supply is tight and the demand is high. “The entire state of California has more money than product,” says George L. Renz, CCIM, of Renz & Renz in Gilroy, Calif. He has the investors: His big- gest challenge is finding deals with good intrinsic value that “truly reflect safety and truly reflect investor’s goals — most of which involve risk avoidance.” In Atlanta, “I am seeing more out-of-town buyers from everywhere in the country and even international,” says Virginia I. Wright, CCIM, vice president of net-leased invest- ments for Bull Realty. “With a strong lease, tenant, and location, they are satisfied without having to visit the property and just enjoy the rent checks. Many buyers would love portfolios of properties; however, these are more difficult to come by.”

Many of those portfolios are going to institutional investors that have turned their attention to net-leased product in the past few years. REITs, insurance companies, and pension funds have contacted CCIM brokers in smaller markets this year, looking for portfolio deals.

Money Is Available
One reason for the interest in net-leased deals is that financing is available at alllevels. With most net-leased properties priced under $5 million, many single-asset purchasers buy with cash, according to the CCIM market round-up. “We have been doing transactions almost always with knowledgeable all-cash buyers who want to close swifly,” says Rob Murdocca, CCIM, of Prescient Property Group in Wayne, Pa. Len S. Jarrott, CCIM, of Jarrott & Co. in Santa Barbara, Calif., has completed three portfolio deals ranging in price from $9 million to $32 million — all 1031 deals that closed with cash. “When I do use debt, I go to life companies,” he says.

Wright adds that a variety of financing sources are available for investors who want leverage, and CCIMs in most markets con- firm this.

“Smaller investment deals are getting financed through smaller, extremely well-capitalized rural banks flush with farmers’ cash,” says Shad J. Phipps, CCIM, a senior associate with CB Richard Ellis in Columbus, Ohio.

“Very desirable rates, usually in the 60 percent loan-to-value range, can be found for qualified buyers with qualified properties,” says Chris Schreiber, CCIM, an associate broker with Kiemle & Hagood Co. in Coeur d’Alene, Idaho.

NNN Challenges
Despite the availability of money for NNN properties, financing is still a concern, given that most local banks require pre-existing relationships. “All of the smaller community banks require that a borrower has an estab- lished track record of working with them,” says Casey Weiss, CCIM, of Access Com- mercial Real Estate in LaCrosse, Wis. Tey also ofen limit their loans to the local area, he adds.

Another problem is conflicting buyer and seller timelines, Murdocca says. “Sellers need to be prepared to meet buyers’ need for due diligence. Triple-net deals sell well, but buyers still want a feasibility period.”

While lack of supply is a problem in almost every market, a hidden niche may be older net-leased properties, Weiss says. “Investors seem to be more interested in NNN proper- ties that have some age, versus brand-new NNN properties,” he says. “Older NNN properties have a lower per-square-foot price, which means that they don’t require as high of lease rates if they are forced to release.”

In today’s market, he adds, “Investors are putting more emphasis on their back-up plans. They realize that losing a tenant is a real possibility, and buying older properties can help them prepare.”

Even with newly developed NNN properties, investors are not taking as many chances, says Gregg H. Tompson, CCIM, general manager of Ratcliff Facilities, in Alexandria, La. Ratcliff specializes in developing NNN properties, recently for Dollar General. “Since there is no such thing as ‘too big to fail’ anymore, investors are exploring options and worst-case scenarios with their properties,” he says. “We are seeing this hedging early in the negotiating phase of our completed development projects.”

Thompson is also concerned about upcoming FASB changes. “As a developer, we feel that these proposed changes will dec- imate the design-build net-leased market by forcing tenants into shorter lease terms or to revert back to fee-simple ownership of properties. Tis will dramatically decrease the attractiveness of commercial real estate as an investment due to increased manage- ment and risk associated with properties.”