What is happening with the perception of today's net lease investor?

What is happening with the perception of today's net lease investor? The private investor, those individuals that are seeking to invest their own money, is essentially seeking a deal. While most net lease investments, by nature, do not have drastic potential for increased future yields, the intital capitalization rate has become more important than in years past.

There have been many transactions over the last several years that garnered extremely low returns for the investor. Sometimes those cap rates were below five percent, but it seemed to make sense for the investor because they were purchasing a depreciate asset that had a sound tenant paying their rent.

However, those very same tenants, with the very same lease terms, are now proving that the buyer is looking to receive a better initial yield then they previously sought.

Lets take a stereotypical net lease investment as an example; a Walgreen. Your local Walgreen is always on the best corner in town, they are an extremely viable company with an investment grade credit rating and their lease is as passive as they come. Additionally, the length of the lease is for an initial term of 25 years with no escape clauses.

There was a day when this bond-like investment would trade at a yield of 5.75%. Which means that the investor would be locked in to that exact same yield for the duration of the lease. But investors felt OK with that since they were also gaining a strong sense of security with the above average real estate they were purchasing as well as the credit rating of the tenant. In today's market environment, however, that very same investment would trade above a 7.00% cap rate. Quite a large difference from years past, but the perception has changed for the investor and they are requiring added yield for their investments, even though the same intrinsic indicators of the investment have not changed.

It is something to consider for both buyers and sellers in today's market that assets priced fairly and appropriately will always trade in any market. 

What is a net lease?
There are different types of leases for commercial property in the U.S. The two most common leases are full-service leases and net leases.

A full-service lease means that the tenant is paying one base amount to the landlord/owner to occupy the space and the owner pays all the expenses related to the building including insurance and property taxes. With a full-service lease, the landlord/owner also is responsible for all maintenance related to the building. For example, if a thunderstorm damages the roof, the landlord/owner must pay for the repairs.

In comparison, a tenant with a net lease is responsible for paying rent plus some or all of the operating expenses of the building such as taxes, insurance premiums, repairs, and utilities. Depending on how the leases are structured, they can be net-net leases or triple-net-leases. Specifically, in the case of a triple net lease, also known as NNN leases, the tenant agrees to pay all of the building's operating expenses, real estate taxes and insurance. Many investors are looking for a safe place to put their money with the wild fluctuations in the financial market. Stable, predictable investment vehicles are increasingly hard to find, but smart investors do have choices. One of the better choices is to invest in net-leased properties, which many investors also call a corporate bond combined with real estate investments that still make sense today.