NEW YORK CITY-As net lease continues exuding appeal to investors who like its combination of long-term cash flow and high yields, so the capital markets have been keeping pace, Meridian Capital‘s Tal Bar-Or tells GlobeSt.com. Bar-Or, one of a panel of industry experts who will address the topic at this year’s RealShare Net Lease conference, coming up April 16 at Convene in Midtown, sees “a lot of opportunities that have opened up in the past 12 months.”
Certainly, there’s always been capital available to finance the acquisition of net lease properties, says Bar-Or, managing director with locally based Meridian. However, he notes that many lenders will occasionally shy away from the sector “because they see it as a binary risk. But at this point, whether or not it’s an investment-grade credit tenant, the competition among lenders has driven them to a point where they’re open to pretty much any property type.” That means “very aggressive financing opportunities” for savvy investors.
Keeping up with the Joneses, though, isn’t going to drive all lenders to provide debt to net lease investors. “If there are lenders that are just not going to do single-tenant no matter what, then no, they’re not coming into it,” Bar-Or says. “But whereas a lender might have initially shied away from single-tenant, they may say, ‘maybe we’ll do a Walgreens with 15 years left on the lease and give them a 10-year loan.’”
The growing competition between CMBS and insurance companies has also opened up “a big spigot” for opportunities to acquire net lease properties, Bar-Or says. “There’s almost a ping-pong between CMBS and insurance companies as to who’s more aggressive at any given time, similar to what you see with Fannie Mae and Freddie Mac,” he says. “At this point, you’re back to a situation where, on a good credit with a long-term lease, CMBS will give you a 10-year interest-only deal.” Similarly, an insurance company confronted with the same type of property is likely to offer a 20- to 25-year self-liquidating loan.
Bar-Or concurs that lenders who remain wary of single-tenant assets may be looking beyond the tenant to the underlying fundamentals, yet he qualifies the statement. “Many lenders may say ‘we would never put a dollar in Detroit,’” he explains. “But then show them a 25-year Walgreens lease in Detroit, they may say, ‘okay, we don’t really care that much about the real estate; we’re looking to the credit of the tenant, and we’re okay because if we do a five- or 10-year deal, we’re content with the credit behind it.’ When you get into a scenario where it’s not necessarily an investment-grade tenant, a short-term lease or even rollover within the loan term, then you’re absolutely looking more at the real estate.”
It’s not a given, either, that a lower-credit tenant will mean stiffer lending terms. “It depends on the leverage point,” says Bar-Or. “At full leverage, absolutely. But at the proper leverage point, you can still walk a lender through an analysis that shows them what the building would be worth if you were to mark it to market.”
That. he says, is where firms such as Meridian come in. The key is “preparing that story and helping lenders to say that yes, maybe that Advance Auto Parts is going to roll in year three of a five-year deal, but it makes sense because the borrower is only looking for 65% leverage, and by the time it amortizes slightly and the rents are below market, you’re in a position that they’ll pay.”