LOS ANGELES—Helping net lease tenants move upthe chain of credit with properly structured leases is an ideal wayto add value to properties whose cap rates are shrinking, saidspeakers at RealShare Net Lease West here last week.Panelists for the “Asset/Portfolio Management”session said structuring leases correctly iscrucial to good management of net-lease properties.

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Moderator Wayne D'Amico, CCIM, 2013president/chairman of CCIM Institute, askedpanelists with values bid up so high, are they trying to increasevalue or stay at the same rate? Brooks G. Gordon,managing director of W. P. Carey, said in the nearterm the biggest place to add value is credit enhancement of thetenant. “They can move up the chain of credit with properlystructured leases. These provisions can be made in the lease upfront.”

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Regarding non-commoditized acquisitions,Mark Selman, SVP, asset management, forAmerican Realty Capital Properties, said his firmis “pruning assets” and will help with the cost of capital whenneeded, especially with well-located properties.

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Joseph C. Yiu, managing principal and CIO ofElmTree Funds, a smaller asset-management firm,said his firm does a lot of build-to-suitfinancing. “We make sure we have a flexible capitalstructure. We're looking at tenants' operating expenses andupgrading systems to try to lower their operating costs.”

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Michael J. Escalante, CIO of GriffinCapital Corp., pointed out that there are a lot ofopportunities to reduce operating costs with what's going on in theenergy segment, so it behooves asset and property managers to learnabout these opportunities and be proactive. “If you think you willjust sit there and collect rent checks, you're sadly mistaken. Wealways ask, 'What can we do to be your real estate solution?' ”

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Gordon commented that for the past 18 months, there has been ahuge ramp-up in net-lease activity. Escalante said it is arelationship-building industry, adding that it often takes seven tonine touches with a potential client to turn it into business.

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When D'Amico asked the panelists how impactful theever-diminishing term is on valuation, Selman said, “It's criticalto get out there in front of it and try to do portfolioextensions.” Gordon added that his firm's goal is to “never get toa lease expiration” by doing blend-and-extend leases, and “we lovewhen a tenant needs capital.”

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In order not to get pinched on tenants leaving after their leaseexpires, Escalante said, “You'd better be investing in the rightcredit. You have to be diversified not to get bitten by tenantsleaving.” Gordon added, “Properties will vacate, so a recyclingapproach—disposition—is huge.” Yiu said his firm is “justmaximizing interest rates and paying down principal.”

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D'Amico asked, “Now that larger players are creeping into thesecondary and tertiary markets, how do you find the skill set formanaging assets? What is this doing to values when the players areso disparate and entering fringe markets?”

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Selman answered that his firm is doing more eight-year vs.15-year leases. He also said the leasing manager and portfoliomanager go out to properties and do due diligence, asking theinvestor, “Do you really want to own that for eight years?”

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Regarding finding the talent to manage these assets in secondaryand tertiary locations, Escalante said, “When you grow yourportfolio from $0 to $7 billion, people start to pay attention—yourreputation and how you conduct yourself will attract talent.”

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Gordon says his firm hires people with a credit-based backgroundand avoids investment-bank hiring. “Each hire is hugelycritical.”

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Keeping our people happy and hiring those with a liberal-artsbackground is Selman's strategy, while Yiu says his firm hiresyoung candidates to teach them the ropes as well senior executiveswith corporate experience. “It's all about lowering operating costsfor your corporations.”

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Carrie Rossenfeld

Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.