it seems that lenders are becoming
more comfortable with the asset
type — many transactions in today’s market are using some sort of
Mortgage brokers are an integral
part of the lending process for net-lease investments, especially because one lender won’t provide the
best rate and terms for a particular
investor every time. Brokers who
want to increase their business in
this asset class should understand
what goes into funding triple-net-lease properties and be aware of
the market’s emerging trends.
Underwriting the tenant
Like in any underwriting process,
lenders consider the real estate’s
value first. With net-lease investments, however, the current tenant’s credit also is weighed heavily.
Because tenants occupying single-tenant buildings typically sign
long leases — sometimes for as
many as 25 years or more — lenders want to know who is actually
paying the rent to support the property for that long. Therefore, the
underwriting of the tenant’s credit
becomes a key factor for lenders
considering net-leased assets.
There is some standardization
for rating tenants, which comes
primarily from credit-rating agencies such as Standard & Poor’s
(S&P), Moody’s Investor Service,
Fitch Ratings, etc. These agencies
each have their own alphanumeric
system to report how a particular company is performing from
a credit perspective. S&P, for instance, has ratings that begin at
AAA as the best-possible credit
and incrementally go down to D.
In today’s lending environment,
net-lease tenants with an S&P
credit rating of BBB or greater have
a better chance of getting a lender’s
attention because they are seen to
be less risky. Tenants with credit
ratings less than BBB are perceived
to be more likely to default over the
term of the lease.
In fact, a Moody’s study quantified this phenomenon, stating that
companies with a BBB- credit rating have a 4-percent chance of defaulting on their lease within any
five-year period. Conversely, a
company that has rating of B- has
a 43-percent chance of defaulting
on its lease within the same period. As a matter of comparison,
companies with AAA ratings have
a 0.15-percent chance of defaulting.
It is pretty clear why lenders focus
their underwriting on the potential
Funding net leases
Although mortgage brokers unfamiliar with this asset class may
think this type of debt comes from
sophisticated sources housed in a
class-A skyscraper on Wall Street,
the vast majority of loans for net-lease investments come from banks.
Real Capital Analytics, a market-research company, recently reported
that 51 percent of single-tenant acquisition transactions completed to-date in 2010 came from a traditional
bank. It also reported, however, that
40 percent came from a national
bank and 11 percent was from a regional or local bank.
It seems that when a recession
hits, the lending environment
changes to a point that sophisticated financing instruments are
no longer needed to drive the market. Instead, individual relationships between borrowers, lenders
and their conduits (i.e., mortgage
brokers) are the primary source of
In addition, Real Capital Ana-
lytics reported that 30 percent of
the transactions completed this
past year used existing financ-
ing that was assumed by a new
buyer. Anecdotally, investors ac-
tive in the market at the beginning
of this year did not have as many
sources of capital. Those who made
purchases that required financing
were given financing quotes that
were outrageous and did not al-
low the transaction to make sense
to the investor. Therefore, they
assumed the debt from the previ-
ous owner because the terms and
interest rates were more favor-
able than the market at that time.
Sourcing debt for net-lease invest-
ments is becoming easier, however.
Gaining market share
Single-tenant properties have become so popular this past year that
they comprised roughly 35 percent
of all commercial real estate transactions completed in the first two
quarters of the year, according to
data from Real Capital Analytics.
By comparison, when the market
was at its peak in 2007, only 20
percent of all transactions included
the asset class.
With more than $425 billion in
total commercial sales in 2007
— which included $85 billion in
single-tenant sales — compared to
$35 billion in total sales for these
past first two quarters — which
included $12.25 billion in single-tenant sales — it is apparent that
with fewer transactions, more
people are steering toward stabilized and lower-risk properties.
Capitalization rates — or cap
rates — are a quick snapshot of an
investor’s return. In today’s market, cap rates are roughly 6 percent
to 8 percent for creditworthy properties. When a basic comparison is
made using other passive investments, it is fairly clear why investors are seeking to put their capital
to work in the property type.
Most investors who have cash
available to make passive, nonspeculative investments are using basic
money-market or savings accounts
to hold the cash. When returns for
those investment vehicles hover
around 1 percent, the investor is
motivated to find alternative investments for that capital while also
maintaining a steady and safe cash
flow over a period of time. Net-lease
properties are filling that void.
There are different periods where
lenders will have a strong appetite
for a particular tenant and less so
for other tenants, and this changes
over time. Brokers who stay on top
of these kinds of trends in their
markets and leverage their relationships with lenders can help clients find the best rates and terms
at any particular moment.
As an example, Walgreen Co.
drugstores — a common triple-net-
lease tenant — have an S&P credit
rating of A+. As such, lenders are
comfortable with these stores’ credit
and viability as a longstanding ten-
ant. At the beginning of this year,
however, there were more than 450
Walgreens stores available for pur-
chase as net-lease investments.
• • •
Net-lease properties have proven to
be a strong asset class in this re-covery-driven market. Lenders are
seeking assets for their portfolios
to maintain strong balance sheets.
It’s always better to have a stabilized net-lease investment earning
income for the lender and the investor on the books as opposed to
vacant, speculative land that likely
has an undetermined value for future development.
Mortgage brokers who focus on
this asset class can take advantage of the new demand for these
properties, as they are some of the
only properties getting funded with
rates and terms last seen at the
height of the market. •
david sobelman is executive vice president of
Calkain Cos. He is the coauthor of The Little Book of
Triple Net Lease Investing,
available at Amazon.com,
and has published more than 20 articles
on the topic for various national publications. Sobelman is a sought-out speaker for
net-lease conferences and institutional-in-vesting events. He also works directly with
clients throughout the United States looking to acquire or sell net-lease properties.
Reach him at firstname.lastname@example.org.