![\"One](\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2017\/05\/Bob-Evans-Port-Charlotte-FL.jpg\")
One of the most notable sale-leaseback transactions in 2016 was Bob Evans Farms Inc.\u2019s $197 million sale-leaseback of 143 restaurants to National Retail Properties Inc. and Mesirow Realty Sale-Leaseback Inc. Bob Evans entered into absolute net master leases with the new owners for an intial 20-year term and will use the proceeds to pay down debt and for other purposes.
Image courtesy of The Boulder Group<\/p><\/div>\n
\u201cWhere the money goes, lending flows,\u201d and the net-lease market continues to offer an attractive destination for capital flows from investors and lenders alike.<\/p>\n
So says Chris Sands, CEO of Sands Investment Group (SIG), a net-lease brokerage specialist. He detects steady investor appetite for single-tenant properties as the niche \u201ctakes on its own asset-class presence.\u201d<\/p>\n
Net-lease sales volume declined 18.6 percent year-over-year in 2016, but the tally is somewhat misleading. A shortage of supply, rather than a dearth of demand, was the main factor that kept the lid on deal volume, concludes JLL\u2019s fourth-quarter 2016 net-lease report. A better indicator of investor interest is that institutional-caliber buyers like banks, private-equity funds and life insurance companies increased their net-lease acquisitions by an average of 115.1 percent last year compared to all real estate acquisitions, the report noted. Increased investor demand has spurred more lenders to get in on the action, providing more financing options for buyers.<\/p>\n
Sands speculated that interest in triple-net-leased properties has grown since the Great Recession because it is \u201ceasy to manage, very predictable for the most part and gives a consistent rate of return.\u201d Single-tenant triple-net leases (STNL) shift much of the cost to tenants, freeing investor time and capital.<\/p>\n
STNL cap rates remain relatively low, clocking in at 6.19 percent for the first quarter of 2017, according to The Boulder Group\u2019s most recent national net-lease update. That figure is unchanged from the fourth quarter of 2016, which registered the first cap-rate increase since the third quarter of 2013.<\/p>\n
Recent interest rate hikes and the potential for more this year have generated uncertainty, however. As a result, transaction volume slowed to start 2017 as buyers responded to higher capital costs by considering repricing, noted Boulder Group President Randy Blankstein.<\/p>\n
Lower transaction volume will continue \u201cuntil we get a sense of where we are in the market,\u201d he predicted, adding that buyers are building in wider spreads in the meantime.<\/p>\n
Capital comfort<\/h2>\n![\"Sands](\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2017\/05\/7-11-TX.jpg\")
Sands Investment Group arranged financing for the buyer of this triple-net-leased 7-Eleven in Fort Worth, Texas. Because only six years were left on the lease, the buyer had to agree to a 45 percent down payment. Image courtesy of Sands Investment Group<\/p><\/div>\n
Meanwhile, plenty of capital is available. \u201cThere are a lot of banks chasing deals hard,\u201d said Jonathan Hipp, president & CEO of Calkain Cos. He added that interest rates are relatively low, especially for core STNL assets with an investment-grade tenant.<\/p>\n
For particularly attractive deals, lenders might offer better terms such as a longer fixed interest rate period or amortization schedule, Hipp added. While banks typically prefer five-year to seven-year loans, they may also offer longer terms, depending on the tenant\u2019s credit strength.<\/p>\n
Because the current market cycle is likely in its later stages, national banks are leaning toward more secure deals, favoring borrowers with properties in primary markets and investment-grade, long-term tenants in place, Blankstein noted.<\/p>\n
However, some lenders have become more comfortable underwriting shorter-term deals in recent years if they\u2019re confident in the tenant\u2019s credit and probability of renewal, as well as the quality of the real estate.<\/p>\n
\u201cShort-term leases are certainly a big part of the market today,\u201d especially for lenders looking for higher yields, Blankstein said. \u201cThere\u2019s only a fixed supply of long-term leases \u2026 so people have to refocus to find the deal flow or yield they\u2019re targeting.\u201d<\/p>\n
Financing is still available for buyers with non-investment-grade tenants, but lenders look more closely at the quality of the real estate than the tenant\u2019s credit to determine loan terms, noted Greg Greene, senior vice president of CBRE\u2019s debt and structured finance group. Lenders will typically offer different terms in exchange for taking on more risk, such as a shorter amortization schedule or fixed-rate term, or a lower loan-to-value ratio.<\/p>\n
While an STNL deal on a property with an investment-grade tenant can borrow around 90 percent of the acquisition cost, the same property with a weaker tenant might qualify for only 65 percent LTV, because of heightened concerns about the tenant\u2019s ability to stay for the duration of the lease and make rent payments, Greene said.<\/p>\n
These safeguards seem to indicate that lenders have learned a crucial lesson from the last recession. \u201cWhere everyone got hurt last time was lenders were financing assets off of whatever price the buyers were paying,\u201d he pointed out. That led to cap rate compression and rising values, but once the market corrected, \u201clenders were upside down on the asset.\u201d They had over-lent and borrowers defaulted because tenants either left or came back for massive rent reductions at the option period.<\/p>\n
SIG recently advised an investor on the purchase of a 7-Eleven with six years left on a long-term lease. Because of the shorter term, the buyer had to put up 45 percent of the price\u2014a relatively large down payment, given the property\u2019s quality and the lender\u2019s experience with 7-Elevens\u2014and the lender adjusted the rent to the market rate. \u201cSome lenders are starting to mark the rent to market on shorter-term deals in an effort to protect or hedge against what might come at the renewal period,\u201d Sands explained.<\/p>\n
Open market<\/h2>\n![\"Mark](\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2017\/05\/Hobby-Lobby.jpg\")
Mark One Capital recently provided a $4.5 million five-year, non-recourse loan for the purchase of a Hobby Lobby. The deal was closed at a 3.9 percent interest rate on a 10-year lease with a 30-year amortization.<\/p><\/div>\n
In addition to the major banks, the CMBS market remains active in the net lease space, \u201cmore so than it\u2019s been in the last year or so, as well as life insurance companies and pension funds,\u201d noted Guy Ponticiello, managing director with CBRE\u2019s Corporate Capital Markets and Net Lease Property Group.<\/p>\n
He added that borrowers looking for financing in the 20-to-30-year range can typically look to these lenders. Robert Nahigian, SIOR, principal of Auburndale Realty Co., noted that these capital sources \u201care not active in the under-$5 million sector,\u201d and typically make loans valued at a minimum of $10 million to $15 million.<\/p>\n
However, it\u2019s all very deal dependent. \u201cIf you have an optimal credit (tenant) in a good market, you will see a variety of lenders getting pretty aggressive,\u201d Ponticiello noted.<\/p>\n
For borrowers seeking smaller loans, or those with tenants that have guarantors behind the lease, regional or local banks are likely the best bet. This is especially common in the quick-service restaurant sector, where a property might have a national banner but the franchisee\u2019s credit is different from the parent company\u2019s. That makes lenders more concerned about the tenant leaving the lease early, Sands explained.<\/p>\n
Equity capital is keeping up with the debt side in chasing net-lease deals. Foreign investment, mostly from Asia and the Middle East, accounts for 20 percent of total net-lease transaction volume, compared to 12 percent in 2007, Ponticiello noted.<\/p>\n
Domestically, private equity and REITs are making abundant capital available, especially for sale-leaseback transactions.<\/p>\n
\u201cWhile with traditional financing you can get 60 to 70 percent financed, in a sale-leaseback you can get 100 percent financed,\u201d Hipp pointed out. Owners can take advantage of tremendous liquidity in the capital markets and pull out 100 percent of their equity while still controlling their real estate and locking in an aggressive cap rate, he noted.<\/p>\n
Last September, SIG worked on the $20.5 million sale-leaseback of 13 independent gas stations in Florida, Georgia and Alabama, as well as the sale of 20 properties with fuel supply contracts.<\/p>\n
SIG brought in net lease REIT Spirit Realty Capital to provide $20 million in financing for the 13 sites via a sale-leaseback deal, under which SIG\u2019s client entered into a 20-year lease agreement with 2 percent annual increases at an 8 percent cap rate. The transaction provided the investor with 100 percent financing for the purchase of the fuel supply operation.<\/p>\n
\u201cOur buyer was able to use the equity in the real estate to finance the acquisition, and the REIT had the opportunity to put capital to work at a superior yield with real estate assets they liked,\u201d commented SIG Managing Director Andrew Ackerman at the time of the deal.<\/p>\n
Hot commodities<\/h2>\n![\"Mark](\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2017\/05\/Walgreens-Mark-One-Capital.jpg\")
Mark One Capital, a service of Marcus & Millichap Capital Corp., recently provided a $6.7 million, 10-year, non-recourse loan for the purchase of a Walgreens portfolio with a 4.8 percent interest rate and 60 percent LTV. The loan is interest-only for the full 15-year lease term, indicating the lender\u2019s comfort with the tenant’s investment-grade credit and renewal probability. Image courtesy of Mark One Capital<\/p><\/div>\n
Besides the gas station\/convenience store category, other attractive net-lease niches include medical office, dollar stores and auto-parts shops, largely because they tend to be recession resistant. \u201cNo matter where our economy goes, if you\u2019re sick, you\u2019re going to a doctor, and if the economy is bad, people will hold their cars longer and look to maintain them,\u201d Hipp observed.<\/p>\n
Sands Investment Group arranged financing for the buyer of this triple-net-leased 7-Eleven in Fort Worth, Texas. Because only six years were left on the lease, the buyer had to agree to a 45 percent down payment. Image courtesy of Sands Investment Group<\/p><\/div>\n
Meanwhile, plenty of capital is available. \u201cThere are a lot of banks chasing deals hard,\u201d said Jonathan Hipp, president & CEO of Calkain Cos. He added that interest rates are relatively low, especially for core STNL assets with an investment-grade tenant.<\/p>\n
For particularly attractive deals, lenders might offer better terms such as a longer fixed interest rate period or amortization schedule, Hipp added. While banks typically prefer five-year to seven-year loans, they may also offer longer terms, depending on the tenant\u2019s credit strength.<\/p>\n
Because the current market cycle is likely in its later stages, national banks are leaning toward more secure deals, favoring borrowers with properties in primary markets and investment-grade, long-term tenants in place, Blankstein noted.<\/p>\n
However, some lenders have become more comfortable underwriting shorter-term deals in recent years if they\u2019re confident in the tenant\u2019s credit and probability of renewal, as well as the quality of the real estate.<\/p>\n
\u201cShort-term leases are certainly a big part of the market today,\u201d especially for lenders looking for higher yields, Blankstein said. \u201cThere\u2019s only a fixed supply of long-term leases \u2026 so people have to refocus to find the deal flow or yield they\u2019re targeting.\u201d<\/p>\n
Financing is still available for buyers with non-investment-grade tenants, but lenders look more closely at the quality of the real estate than the tenant\u2019s credit to determine loan terms, noted Greg Greene, senior vice president of CBRE\u2019s debt and structured finance group. Lenders will typically offer different terms in exchange for taking on more risk, such as a shorter amortization schedule or fixed-rate term, or a lower loan-to-value ratio.<\/p>\n
While an STNL deal on a property with an investment-grade tenant can borrow around 90 percent of the acquisition cost, the same property with a weaker tenant might qualify for only 65 percent LTV, because of heightened concerns about the tenant\u2019s ability to stay for the duration of the lease and make rent payments, Greene said.<\/p>\n
These safeguards seem to indicate that lenders have learned a crucial lesson from the last recession. \u201cWhere everyone got hurt last time was lenders were financing assets off of whatever price the buyers were paying,\u201d he pointed out. That led to cap rate compression and rising values, but once the market corrected, \u201clenders were upside down on the asset.\u201d They had over-lent and borrowers defaulted because tenants either left or came back for massive rent reductions at the option period.<\/p>\n
SIG recently advised an investor on the purchase of a 7-Eleven with six years left on a long-term lease. Because of the shorter term, the buyer had to put up 45 percent of the price\u2014a relatively large down payment, given the property\u2019s quality and the lender\u2019s experience with 7-Elevens\u2014and the lender adjusted the rent to the market rate. \u201cSome lenders are starting to mark the rent to market on shorter-term deals in an effort to protect or hedge against what might come at the renewal period,\u201d Sands explained.<\/p>\n
Open market<\/h2>\nMark One Capital recently provided a $4.5 million five-year, non-recourse loan for the purchase of a Hobby Lobby. The deal was closed at a 3.9 percent interest rate on a 10-year lease with a 30-year amortization.<\/p><\/div>\n
In addition to the major banks, the CMBS market remains active in the net lease space, \u201cmore so than it\u2019s been in the last year or so, as well as life insurance companies and pension funds,\u201d noted Guy Ponticiello, managing director with CBRE\u2019s Corporate Capital Markets and Net Lease Property Group.<\/p>\n
He added that borrowers looking for financing in the 20-to-30-year range can typically look to these lenders. Robert Nahigian, SIOR, principal of Auburndale Realty Co., noted that these capital sources \u201care not active in the under-$5 million sector,\u201d and typically make loans valued at a minimum of $10 million to $15 million.<\/p>\n
However, it\u2019s all very deal dependent. \u201cIf you have an optimal credit (tenant) in a good market, you will see a variety of lenders getting pretty aggressive,\u201d Ponticiello noted.<\/p>\n
For borrowers seeking smaller loans, or those with tenants that have guarantors behind the lease, regional or local banks are likely the best bet. This is especially common in the quick-service restaurant sector, where a property might have a national banner but the franchisee\u2019s credit is different from the parent company\u2019s. That makes lenders more concerned about the tenant leaving the lease early, Sands explained.<\/p>\n
Equity capital is keeping up with the debt side in chasing net-lease deals. Foreign investment, mostly from Asia and the Middle East, accounts for 20 percent of total net-lease transaction volume, compared to 12 percent in 2007, Ponticiello noted.<\/p>\n
Domestically, private equity and REITs are making abundant capital available, especially for sale-leaseback transactions.<\/p>\n
\u201cWhile with traditional financing you can get 60 to 70 percent financed, in a sale-leaseback you can get 100 percent financed,\u201d Hipp pointed out. Owners can take advantage of tremendous liquidity in the capital markets and pull out 100 percent of their equity while still controlling their real estate and locking in an aggressive cap rate, he noted.<\/p>\n
Last September, SIG worked on the $20.5 million sale-leaseback of 13 independent gas stations in Florida, Georgia and Alabama, as well as the sale of 20 properties with fuel supply contracts.<\/p>\n
SIG brought in net lease REIT Spirit Realty Capital to provide $20 million in financing for the 13 sites via a sale-leaseback deal, under which SIG\u2019s client entered into a 20-year lease agreement with 2 percent annual increases at an 8 percent cap rate. The transaction provided the investor with 100 percent financing for the purchase of the fuel supply operation.<\/p>\n
\u201cOur buyer was able to use the equity in the real estate to finance the acquisition, and the REIT had the opportunity to put capital to work at a superior yield with real estate assets they liked,\u201d commented SIG Managing Director Andrew Ackerman at the time of the deal.<\/p>\n
Hot commodities<\/h2>\nMark One Capital, a service of Marcus & Millichap Capital Corp., recently provided a $6.7 million, 10-year, non-recourse loan for the purchase of a Walgreens portfolio with a 4.8 percent interest rate and 60 percent LTV. The loan is interest-only for the full 15-year lease term, indicating the lender\u2019s comfort with the tenant’s investment-grade credit and renewal probability. Image courtesy of Mark One Capital<\/p><\/div>\n
Besides the gas station\/convenience store category, other attractive net-lease niches include medical office, dollar stores and auto-parts shops, largely because they tend to be recession resistant. \u201cNo matter where our economy goes, if you\u2019re sick, you\u2019re going to a doctor, and if the economy is bad, people will hold their cars longer and look to maintain them,\u201d Hipp observed.<\/p>\n
Mark One Capital recently provided a $4.5 million five-year, non-recourse loan for the purchase of a Hobby Lobby. The deal was closed at a 3.9 percent interest rate on a 10-year lease with a 30-year amortization.<\/p><\/div>\n
In addition to the major banks, the CMBS market remains active in the net lease space, \u201cmore so than it\u2019s been in the last year or so, as well as life insurance companies and pension funds,\u201d noted Guy Ponticiello, managing director with CBRE\u2019s Corporate Capital Markets and Net Lease Property Group.<\/p>\n
He added that borrowers looking for financing in the 20-to-30-year range can typically look to these lenders. Robert Nahigian, SIOR, principal of Auburndale Realty Co., noted that these capital sources \u201care not active in the under-$5 million sector,\u201d and typically make loans valued at a minimum of $10 million to $15 million.<\/p>\n
However, it\u2019s all very deal dependent. \u201cIf you have an optimal credit (tenant) in a good market, you will see a variety of lenders getting pretty aggressive,\u201d Ponticiello noted.<\/p>\n
For borrowers seeking smaller loans, or those with tenants that have guarantors behind the lease, regional or local banks are likely the best bet. This is especially common in the quick-service restaurant sector, where a property might have a national banner but the franchisee\u2019s credit is different from the parent company\u2019s. That makes lenders more concerned about the tenant leaving the lease early, Sands explained.<\/p>\n
Equity capital is keeping up with the debt side in chasing net-lease deals. Foreign investment, mostly from Asia and the Middle East, accounts for 20 percent of total net-lease transaction volume, compared to 12 percent in 2007, Ponticiello noted.<\/p>\n
Domestically, private equity and REITs are making abundant capital available, especially for sale-leaseback transactions.<\/p>\n
\u201cWhile with traditional financing you can get 60 to 70 percent financed, in a sale-leaseback you can get 100 percent financed,\u201d Hipp pointed out. Owners can take advantage of tremendous liquidity in the capital markets and pull out 100 percent of their equity while still controlling their real estate and locking in an aggressive cap rate, he noted.<\/p>\n
Last September, SIG worked on the $20.5 million sale-leaseback of 13 independent gas stations in Florida, Georgia and Alabama, as well as the sale of 20 properties with fuel supply contracts.<\/p>\n
SIG brought in net lease REIT Spirit Realty Capital to provide $20 million in financing for the 13 sites via a sale-leaseback deal, under which SIG\u2019s client entered into a 20-year lease agreement with 2 percent annual increases at an 8 percent cap rate. The transaction provided the investor with 100 percent financing for the purchase of the fuel supply operation.<\/p>\n
\u201cOur buyer was able to use the equity in the real estate to finance the acquisition, and the REIT had the opportunity to put capital to work at a superior yield with real estate assets they liked,\u201d commented SIG Managing Director Andrew Ackerman at the time of the deal.<\/p>\n
Hot commodities<\/h2>\nMark One Capital, a service of Marcus & Millichap Capital Corp., recently provided a $6.7 million, 10-year, non-recourse loan for the purchase of a Walgreens portfolio with a 4.8 percent interest rate and 60 percent LTV. The loan is interest-only for the full 15-year lease term, indicating the lender\u2019s comfort with the tenant’s investment-grade credit and renewal probability. Image courtesy of Mark One Capital<\/p><\/div>\n
Besides the gas station\/convenience store category, other attractive net-lease niches include medical office, dollar stores and auto-parts shops, largely because they tend to be recession resistant. \u201cNo matter where our economy goes, if you\u2019re sick, you\u2019re going to a doctor, and if the economy is bad, people will hold their cars longer and look to maintain them,\u201d Hipp observed.<\/p>\n
Mark One Capital, a service of Marcus & Millichap Capital Corp., recently provided a $6.7 million, 10-year, non-recourse loan for the purchase of a Walgreens portfolio with a 4.8 percent interest rate and 60 percent LTV. The loan is interest-only for the full 15-year lease term, indicating the lender\u2019s comfort with the tenant’s investment-grade credit and renewal probability. Image courtesy of Mark One Capital<\/p><\/div>\n
Besides the gas station\/convenience store category, other attractive net-lease niches include medical office, dollar stores and auto-parts shops, largely because they tend to be recession resistant. \u201cNo matter where our economy goes, if you\u2019re sick, you\u2019re going to a doctor, and if the economy is bad, people will hold their cars longer and look to maintain them,\u201d Hipp observed.<\/p>\n