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Based on the most helpful WSO content, here's what you need to know about net lease real estate:
Understanding Net Lease Real Estate:
Types of Net Leases:
Absolute Triple Net Lease:
Generating High Returns:
Cap Rate Application:
Risk and Return:
Market Dynamics:
Interesting Aspects:
Predictable Cash Flow:
Long-Term Leases:
Investment Strategy:
Conclusion:
Net lease real estate can be as straightforward as applying a cap rate to NNN rent, but understanding the nuances of lease structures, market dynamics, and risk factors is crucial for generating high returns. The predictability and stability of cash flows make it an attractive investment, especially when combined with strategic property selection and market analysis.
Sources: CAP RATE Interview, Types of RE Leases - A Primer, Industrial Properties - What are the key things to know?, Senior Housing future?, Thoughts on NNN Retail
Most NNN leases have max increases or have it tied to some index on CAM/Controllable opex costs from year to year and there's going to be some leakage likely from an OH perspective, so you'll need to model that and operate relatively efficiently for that. Otherwise it's pretty much that easy, you're basically looking at leasing profiles and renewal probabilities to get valuations.
There's a lot of shit that goes wrong outside of just a spreadsheet, so tenants can elect to terminate and pay sort of fee, people don't pay rent or reimbursements on time/at all, don't renew or renew at lower than expected on the outset, etc. Just because you signed some documents doesn't mean that everyone's gonna follow the rules.
Tenants also look at rent holistically with operations costs so if you're inefficient they'll take the delta out of your rents, IE tenant wants to pay $25/foot either way, but if your opex goes from $5 to $7 a foot then they'd rather pay $20/18 respectively.
Way more important to have contacts within Tenant’s real estate teams and understand store performance / profitability.
But yes it is really that easy, clip the coupon and hope they renew.
It's the credit analysis that's the difference here. Unless you are talking about the broker blasts about a Walgreens in middle America which is technically a NNN play, most net lease groups that have scaled or groups that are entering into the space are taking a different approach than that. You are mainly looking for predictable cashflow streams and solid IG tenants (as that's where the arb generally is), one example of an outsized return would be when your single tenant net lease occupier gets a credit upgrade causing cap rate compression and you can exit at a tighter rate. I am sure there are other scenarios as I do not work in the space but have spoken to a few guys and I think that's my high level understand of it.
Yes, it truly is that simple. Only 'value-add' you can do on a long-term STNL property is accumulate a portfolio to earn a 'portfolio premium' to lower your exit cap which sounds great. But in the time you're accumulating, you're losing WALT, which will push the exit cap up, so there's ultimately very limited upside.
Read up on Blue Owl Capital... Pretty much their entire Investment Thesis
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