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The Net Lease Asset: Less Risk, Favorable Returns

The casual dining chain represents the latest investment in multi-location franchises by private equity firm NRD Capital.

For many investors, net leased assets are proving to be steady, low-risk alternative investments for their portfolios. Read on to learn why.

Investors today are increasingly turning to alternative assets for their portfolios. And many of those investors are examining net leased properties as a viable addition to their portfolio.

In a lot of cases, net leased assets can provide favorable returns with less risk and minimal oversight. This is because net lease properties have the “three-C” advantage: corporate, credit, and contract.

  • Corporate. Net leased properties contain occupiers that, in many cases, are backed by national corporations or well-known regional companies. Advanced Auto, Dollar General, Kohl’s, McDonald’s and Walgreens are great examples of net lease tenants. Depending on the lease, income stream won’t dry up if the tenant leaves before the end of the lease. The corporation guarantees payments through the lease term.

  • Credit. The properties are frequently occupied by credit-worthy tenants. Even tenants carrying a level or two below a BB+ investment grade can provide a steady income stream, at little risk.

  • Contracts. The contract, or lease, on a net lease property can span 10 to 25 years, with renewal options and rent bumps. If the contract spells out an absolute net lease – also known as triple-net (NNN) – the investor doesn’t have to worry about maintenance costs, tax payments or other financials connected to the property.

Even with the benefits of net leased properties as alternative investments, there is another “c” to consider: caveats. Though caveats can be minimized with good real estate fundamentals, it would be negligent to ignore them.

First, similar to all real estate, net lease properties are illiquid. They can’t be immediately sold if the investor needs immediate money. In addition, property values can change, depending on market demand and cycle, with those values having an impact on cap rates.

Second, even with rent increases, a net leased property’s rate of return is fixed throughout a hold, thereby limiting its upside. Still, the return from net leased investments are higher than bonds, which is why they could be considered real estate wrapped in a bond.

Finally, though 100% occupancy is a given with a net leased property, so is 100% vacancy if the tenant doesn’t renew. In such a case, the owner needs to find another tenant and could incur additional capital expenses to prepare and re-lease the space. However, choosing a prime location and adaptable floorplan at the onset can help kickstart a new income stream with a relatively easy re-tenanting process.

Though there are risks in any kind of investment, net leased assets can provide a stable fixed income, with little worry and hassle. Such properties can help investors advance returns, with only a slight risk increase, and should be included in any balanced portfolio.

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