OUR FAVORITE REAL ESTATE DEAL

There are many paths to a great investment. The key is finding a place where you understand the upside and risks better than your competition. At Alliance, our specialty is operating net lease commercial properties. Quality net lease properties are stable, cash producing investments that require minimal day-to-day operational responsibilities. Depending on the terms of the agreement, a net lease property makes tenants responsible for any combination of maintenance, insurance, capital improvements, and even property taxes.

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Putting more responsibility onto the tenant is helpful for a variety of reasons. One advantage is that it caters to the type of tenant who wants to invest capital in the property, which deepens their commitment to staying long term. I can never emphasize enough how important it is to keep tenant turnover low. The time savings of owning a property that is managed by the tenant is another big advantage.

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Our net lease real estate strategy focuses on free standing, single tenant properties. We love these assets because the tenants are often sophisticated players that know their business very well. Often part of larger chains, these tenants make the properties more productive for their own needs. whether with exclusive parking, drive through, loading docks, or other property modifications. Specializing in this space gives Alliance access to a higher quality tenant pool of savvy businesses that are less likely to default than your average commercial tenant.

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The financial crisis in 2008 gave us a great lesson on the advantages of high quality tenants. While many tenants defaulted, net lease properties were more stable. This is largely because of the quality of tenant you find in net lease. It’s counterintuitive, but the type of tenant that signs up for a net lease is prepared for the financial obligations of handling all insurance, maintenance and taxes on the property and is therefore a safer bet to withstand a financial downturn than your typical tenant.

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From a landlord’s perspective, having a long term commitment from a high quality tenant that will manage the property for you is pretty ideal. You certainly can’t bank on everything going smoothly, but when the stars align, you can develop a great long term relationship with the tenant that benefits both sides.

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In the best net lease scenarios, the monthly cash flow is nice, but not game changing. The real upside, however, comes from rising property value. As always, we want a good location that is well suited to the specific needs of a tenant. That might mean an intersection with foot traffic for a drug store, a nearby hospital for a specialized medical center, good infrastructure access, etc. The local supply and demand dynamics are still paramount, so we look at competing properties with the same critical eye.

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One small note about investing in a net lease property: We are always careful to execute an estoppel agreement, clarifying all the rights and responsibilities of tenant and landlord, before signing. Lenders specialize in judging creditworthiness, and good ones won’t offer a loan until all this due diligence is in order. Because they’re so good at this, I love getting my bankers’ opinions on a prospective investment earlier rather than later.

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If done well, net lease properties are stable real estate investments that bring in high quality tenants. Like bonds, they can have a steady cash flow with strong risk-adjusted returns. And unlike bonds, these properties still show significant capital appreciation. Net lease properties combine some of the best elements of fixed income and real estate. That’s my idea of smart investing.

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Call me at 847-317-0077, email me at breinberg@alliancecgc.com, or tweet me at @benreinberg or @alliancecgc if you can submit us a property to acquire and/or would like to invest with us. For further information on investing with Alliance, please click here.

My Best,

Ben

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