Why Net-Leased Deals Are Hot and How Clients Can Get the Most Value
Net-lease properties are popular with investors for all the right reasons. Under a net-lease agreement the tenant not only pays rent but also assumes responsibility for insurance, taxes, and maintenance of the property. “Because of the passive, low management nature of these opportunities and the fact they are often guaranteed by large corporations, we have been successful in achieving top-of-market pricing for these investments,” says James Medefind, senior associate in Marcus & Millichap’s Tampa office.
“The security of cash flow that comes with the corporate guarantee behind many of these leases is one reason these properties are so popular,” says Medefind. “Landlords don’t have to worry about collecting rent or dealing with the hassle of leasing vacancies like you do in other product types,” he adds.
The properties are also generally hands-free. “Under a triple-net agreement the tenant takes care of everything, and you can lock them in for 20 years or more,” says Medefind. “That’s great if you want to travel or receive what we call ‘mailbox checks.’ We relate these investments to purchasing a bond. They are so passive owners often forget they own real estate.”
Similarly structured, double-net lease agreements require a little more investor involvement: Landlords are responsible for big-ticket capital expenditures, such as replacing a roof or resurfacing a parking lot. Medefind notes that these can also be low management investments, but investors will need to plan and budget for maintenance. Investors should also watch for situations in which the tenant has the right to terminate the lease.
Match the investment to your goals
“With every investor interested in a net-lease property, my job is to understand what they hope to achieve,” says Medefind. “Are they looking to mitigate risk by finding the largest national corporate tenant possible, or is the amount of cash coming off the property most important? If that’s the case, a fast-food franchise or smaller corporate tenant might be best — something that involves a little more risk but delivers a higher return.”
Once he defines an investor’s goals relative to their lifestyle and income, and determines whether the investor is trying to replace current income or generate it from a new source, Medefind looks for a tenant match.
“Marcus & Millichap has the largest inventory of properties, so I’m able to find the best fit for my clients,” he says. “We’re in an incredibly strong market right now — seeing record prices for net-leased properties, so sellers would do well to look at current cap rates, and buyers need the best information and biggest pool of options they can get. That’s where we can really help.”
Net-lease is a great way to go, as long as you’re clear on your goals for the property and have good guidance in your search for the right fit.