Photo by Shutterstock.

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There is a prevalent notion that an investor can just buy a netlease property and enjoy the rent checks rolling in each month. ButNoah Shaffer, senior director of asset management for ConfidantAsset Management, says that isn't always the case.

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"Landlords are starting to get calls from Walgreens and others,saying, 'Hey, Amazon is really killing us," Shaffer says. "'We'regoing to need a 25% rent reduction.' And those landlords, whothought this was a passive investment for 15 years, aren't preparedto make a decision on something presented by the corporate tenant.So, as a result, they make poor decisions about their investmentasset."

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In some cases, retailers aren't even offering to negotiate withtheir landlords. They're just closing up shop.

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"Retailers are failing," Shaffer says. "This is a real threat tonet lease landlords. Not only will landlords lose the rentalincome, but they will also have to service the property tax,utilities and insurance for the site. Strong retailers are usingthis dialogue to leverage and scare net lease landlords into rentreductions."

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Outside of a large tenant asking for a restricting, there are alot of other ways landlords in net lease could run into problems,including difficulty collecting insurance and property taxes anddeferred maintenance.

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"Deferred maintenance is a real thing," Shaffer says. "Failingto pressure wash the mold off your Walgreens and its roof couldresult in damage to the building structure that is much more costlythan a bi-annual wash."

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Net lease investors also need to be aware of things that theirtenants do. For instance, Shaffer knows of an example of afranchisee performing remodels and stiffing the contractor formillions of dollars in work. The contractor then filed a lienagainst the property. "The landlord was unaware of the lien and howto remove it from the property," he says.

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In other cases, retail locations may be closed before thelandlord even knows. In this environment, Shaffer says landlordsmust be proactive. For instance, at a Pier 1 in Tallahassee,Shaffer's team began marketing a property for lease and sale with alocal broker a year in advance of the lease expiration because itnoticed Pier 1 was struggling at the corporate level.

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In many cases, Shaffer says these landlords aren't planningahead for these bad situations. "As a result, they are forced tomake poor decisions regarding their investment, or take what ishanded to them," he says.

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A better way to avoid problems is to buy good real estate incorners with traffic signals, Shaffer says. "When you buy it, it'sno longer buying it on the income stream," he says. "It's buying itwith a secondary use in mind as the tenant leaves."

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Shaffer also prefers smaller locations, ranging from 1,800 to3,000 square feet. "You can usually find another national tenant tomove into that space at the right rates," he says.

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Leslie Shaver

Les Shaver has been covering commercial and residential real estate for almost 20 years. His work has appeared in Multifamily Executive, Builder, units, Arlington Magazine in addition to GlobeSt.com and Real Estate Forum.