The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful:
Many investors make the mistake that every dollar should be treated with equal value, and that every dollar needs to be maximized. Not all investment money should be treated the same, and one should instead look at the value they place individually on the dollars they’re investing into the net lease market. Are you looking for security? For financial freedom? Direct each dollar to where you want it to go, and view those investments in that frame of mind as you approach the net lease market.
Richard Wilson: So, based on your experience, what are a couple of strategies that an inexperienced triple net investor would take? You kind of hinted earlier about how maybe going after very high credit but maybe what would be considered a bad location might get you a better cap rate and your downside is really limited by the fact that it’s based on a credit of this firm as long as it’s not by a local franchisee – that sounds like one strategy an investor could keep in mind. Is there another strategy or two related to this area that could be helpful to the investors listening?
Peter Von Der Ahe: Yeah, and I guess I would put the first thing out there, that’s kind of a mindset that I think a lot of, that I see investors go through is a lot of investors show up initially and they think all their money has to be treated the same. Which means “I’ve got to maximize every single dollar I have”, and if you step back a little bit and, not to get philosophical, but if you think about what’s the value of money or what purpose does money serve in your life – a lot of times it’s to give you freedom, it’s to give you some type of security, and if you start the conversation there, not every dollar in your portfolio has to be treated the same way. So, I think it’s completely appropriate to look at some dollars and say “Okay, these, this money should be treated to give me security.” or cover certain things, and so that may impact how you approach what’s available in the net lease market.
Another strategy that we’ll see that can be a little more entrepreneurial is, as I said before, a lot of these investments come out of the gate with 20 year leases. When you begin to cross the threshold where there’s 10 years remaining on the lease, and knowing most banks will give you 10 year mortgages, when you have fewer than 10 years left on the lease, that would be the time period when the value would be impaired in theory. Meaning even though that tenant could be doing your gangbusters business and could have great credit, you are introducing the lease expiration into that conversation that may have 7 years left, or 3 years left, and so that’s uncertainty. And so, whoever’s buying that property from you will want to be paid for that type of uncertainty, and the bank will want to make sure that their protected from that uncertainty. So, the loan dollars may be lower, the buyer pool may be smaller.
On the other hand, if you want to be more entrepreneurial, that’s where some buyers will look at those properties with the lease expirations, where you have fewer years left on the lease, because that may be an opportunity to pick up something at a better cap rate if you’re willing to do the market research or you’re comfortable with the risk. Either the tenant is going to renew or retenent it, or some other option. So, that’s one of the areas where the business can become more entrepreneurial.
Richard: Right, makes sense. Okay.