Contributing Author: Sean O’Shea
It’s kind of funny to be considered, nominally, as a ‘nationally-recognized net lease expert’ after all these years.
My first exposure to this asset class was back a few decades ago, when I was charged with developing a real estate portfolio for a mineral-asset based Family Office in Fort Worth whose patriarch and predecessors were legendary oil wildcatters who wanted diversification to their Bond Portfolio.
My own background had been as a junior partner in a regional development firm with appropriate higher risk returns; and as a Shareholder of a regional commercial brokerage, whose business model was based on acute data and cultivating relationships, as the foundations for our demonstrative success in tough East Coast markets.
So I, initially, viewed these NNN assets, whether ground up development or corporate Sale-leasebacks, as being priced at a premium for retail disposition with modest “Bond-equivalent” returns.
Who would buy a premium-priced asset that we could build ourselves?
Such lower returns were completely unacceptable on my first round review, based on my experience of having created value and much higher returns; as well as, the negotiated values that translated to whatever the market might bear due to absorption rates and market dynamics in specific office markets.
So, my Clients instructed me that I, fundamentally, did not understand ‘the role’of these net leased assets, as a risk-averse investment with tax advantages, to offset their substantial income streams from other sources.
They, further, suggested that while I had been focused on creating substantial value as a developer (much like their historical oil and gas businesses); but they were focused on diversifying and sustaining value… a different orientation as high net worth investors.
This served as major moment of my real estate education which set me on a path to more fully understand that there is a role for stable, safer, more predictable income streams rather than the risk of the development process.
NNN properties, whether corporately guaranteed income streams by an investment grade tenants providing a Bond-like option or “Fixed-income alternative”; or the ubiquitous retail fast foods, automotive outlets or the emerging medical service locations, all represent credible options for investors.
They serve as terrific options for Multi-Family and other investors who have experienced the run up in values in the last 10 years, and as IRC 1031 Exchange buyers to execute a tax deferral strategy, these net lease assetscan be the Solution.
Clearly, various REITs have emerged that focus on the stable predictable income stream and some value accretion, subject to the debt environment at disposition and savvy acquisition strategies at the outset.
Remember, as stated in prior blogs, “ Not all Net Lease properties are the same”.