Home News The DI Wire Q&A with Inland’s Dan Zatloukal on Net Leased Properties

The DI Wire Q&A with Inland’s Dan Zatloukal on Net Leased Properties

The DI Wire discusses net leased properties with Dan Zatloukal, executive vice president, head of asset and portfolio management at Inland Real Estate Investment Corporation.

The DI Wire discusses net leased properties with Dan Zatloukal, executive vice president, head of asset and portfolio management at Inland Real Estate Investment Corporation.

What are net leased properties?

Net leased properties are single-tenant properties where the tenant is responsible for paying operating expenses such as insurance, taxes, and common area maintenance costs in addition to rent. The highest level of net lease is the absolute net lease, whereby the tenant is responsible for 100 percent of all expenses at the property, including all capital expenses of any kind. These are also often called true triple net (NNN) leases. In many net leases, the tenant is responsible for all expenses except the “roof and structure.” These are commonly referred to as double net, or NN Leases.

What makes net leased properties attractive?

Net leased properties are attractive to commercial real estate owners due to their stable cash flows and relative simplicity in terms of management and accounting when compared to traditional operating real estate.

Net leased properties are also appealing to tenants because they can fully control the property and its expenses without having to own the property, thereby freeing up precious capital to be spent on its actual business.

What are some examples of common tenants that generally occupy net leased properties? There are many types of tenants that occupy net leased properties. The most common are pharmacies, banks, dollar stores, fast food restaurants, auto supply stores, industrial distribution centers and more recently, grocery stores.

Are there certain criteria that makes some NNN properties more successful than others? For example, a drive-through, 24-hour access, location or the property’s surrounding demographics?

It’s important to note that the net lease in and of itself doesn’t make for a successful real estate investment for an owner or a location for a tenant. The net lease simply lays out the terms of operating the real estate between the landlord/owner and the tenant. At the end of the day, the tenant is running its business out of that location, and the success is based on many variables. This is still real estate, and the old adage of location, location, location still applies. Is the location easily accessible to consumers? Is it on a main street that is heavily trafficked? Do the products or services the tenant is selling/providing match up with the surrounding demographics? What is the competitive landscape in the immediate area for the tenant?

From the investment side, we also consider:

The tenant – What is the tenant’s credit rating? Is it a franchise? What do their balance sheets disclose? What are the long-term prospects for the tenant’s industry?

The lease – How much time is remaining on the lease? What are the terms of the lease? Are rent increases built into the lease? How do the rents compare to the rest of the market? Is this an absolute NNN Lease, or is it NN?

Debt – The mosaic of all this information leads to value and “finance-ability” of the property. The better the overall story is, the more favorable the financing terms will be.

As you look ahead, what trends do you see for net leased properties? Do you expect demand for net leased properties to change in the coming months? Years?

In general, we believe the investor demand for net leased properties will continue to be significant going forward. E-commerce is obviously here to stay which has also helped increased demand for industrial distribution centers, but on the net leased retail side of things, businesses that are necessity-based/daily needs/essential should continue to do well. Grocery stores are a great example of this. They are positioned to compete with and/or complement e-commerce, and this has only accelerated since the onset of the pandemic. Over the last several years, we’ve seen grocery stores increase the “click and pick” structure allowing for curbside pickup. We’ve also seen third-party apps provide shopping and delivery to consumers, and even some grocery stores delivering directly to shoppers.

One additional aspect we are currently interested in are rental increases. Historically, some net leased property types have limited rental increases.

Are there new NNN property concepts on the horizon?

A couple of areas that we have been active in over the last several years is net leased medical office and industrial distribution centers. We believe these are very stable sectors, when combined with the characteristics of the net lease discussed above, we feel these asset sectors will garner high investor demand.

How have NNN properties fared during the pandemic, and what is the outlook for them moving into 2021?

This really depends on the business type. Tenants and businesses that have been deemed essential, have performed exactly as projected. These include grocery stores, pharmacies and dollar stores, to name a few. Demand for industrial distribution centers has also continued to increase due to Amazon and other e-commerce fulfillment businesses.

However, other types of businesses, especially casual restaurants, have had a tougher time due to the pandemic. We do believe that these businesses will make a recovery, once the vaccines have been fully implemented, unemployment numbers decrease, and the economy stabilizes.

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