Net Lease properties are attractive to investors interested in a steady income without management responsibilities. Tenants are investment-grade and sign leases for as long as 20 years. They give investors an opportunity to diversify their portfolio with a stable, yet profitable property.
Due to their desirability, some investors take advantage of favorable lending conditions. They are building their own Net Lease properties.
While this may seem difficult, Net Lease properties are ideal projects for developers seeking to value-add under-utilized property. It is also easier to find lenders willing to provide funds.
Financing A Net Lease Property
Net Leased deals are easier to finance than other types of commercial investment properties. Financing is available at all price levels, especially when the investor has already lined up a well-known franchise like AutoZone or McDonald’s.
Banks are less worried about the loan to value (LTV) ratio than they are the debt coverage ratio (DCR) since their main interest is ensuring the business that occupies the property will make money.
It’s not uncommon to find LTV ratios anywhere from 50% – 100%, although a 100% loan is unusual to find unless you happen to be a developer with perfect credit with a national client and a long lease.
Generally, banks are looking for a 1.0 – 1.3% DCR, three, five, or seven years fixed and amortized for 30 years at 3-4.40%.
Financing Net Lease Development
There are three main ways to capitalize a Net Lease project.
One way is through build-to-suit projects, where a developer builds a building to the specifications of a particular tenant.
In this case, the developer can structure a joint venture where the completed project is sold and the profit split with the equity partner.
The developer earns a profit without having to search for bank loans, and the partner comes out ahead with a Net Lease property with an industrial grade tenant in a long-term lease.
The developer also can find a long-term owner from the beginning, without requiring the future owner to purchase the property. The construction itself would be funded by monthly draws. Upon the completion of the construction, the owner would purchase the property from the developer at a previously agreed CAP rate.
If the developer chooses to fund a build-to-suit project on his own, he typically requests what is termed a “hedge”. This is a contract that requires the future owner to sign a non-refundable contract and give a deposit in case the owner reneges.
And lastly, the developer can acquire land on his own, build the property, and continue to maintain ownership, leasing the property to a suitable Net Lease tenant.
If you’re inexperienced in developing land, you can hire a developer to build the actual facility, while you source, structure, and facilitate the actual transaction. As the property owner, you can either keep the property for long-term investment, or you can sell the property once it is completed.
If you live in a rural community and have a good relationship with your local bank, you might also go for a smaller deal. These banks are sometimes well-capitalized and are able to offer rates of around 60% LTV to qualified buyers.
Trends In Net Lease Property Types
Right now the trend is leaning heavily towards industrial Net properties. There were over 51 million square feet of industrial build-to-suit properties built this year, with an additional 67 million already under construction.
This trend, which is being driven by eCommerce, is expected to continue in 2017 and 2018 as businesses experiment with combining online sales with brick and mortar businesses. These businesses are investing heavily in their supply chains in order to ensure they aren’t swallowed whole online competitors like Amazon.
Investors are also expanding their interest in Net Lease properties to older NNN properties, which not only cost less but also don’t need high lease rates in order to make a profit.
Older Triple Net Lease properties – if suitable due diligence is done – are perfect opportunities for renovations, allowing the investor to increase property value and raise the NOI.