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When interest rates are higher and less debt is available in themarket, David Sobelman, CEO and President for Generation IncomeProperties, says net lease underwriting is disciplined and dealsare heavily scrutinized. But when interest rates are low and debtis readily available, unsophisticated buyers come in and makemistakes.

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"They may have never owned an expensive,asset-management-intensive commercial real estate property before,"Sobelman says. "These are typically the least sophisticatedinvestors who look less at a real estate asset's intrinsicunderwriting measures than someone who is actively looking to ownand manage assets as a full-time profession." Right now, rates arelow, and that could lead to problems, according to Sobelman.

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"I have had the privilege of being intimately involved withseveral market cycles, over the previous seventeen years, whereinvestor demand has expanded and contracted synonymously withtenants' respective national and regional footprints," Sobelmansays. "This hindsight has ironically provided a tremendous amountof insight into the psychology that invariably changes withinvestors given a specific snapshot of time in any particularcycle."

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Take big box properties, for instance. Sobelman says they oftenhave tenants that novice investors perceive as creditworthy. Also,the assets are triple net leased. "That combination of attributesis a recipe for attraction of capital from those that have beensmart or lucky enough to figure out how to make a few dollars intheir life and want to explore the 'passive' nature of theinvestment that their net lease broker has so egregiously touted,"Sobelman says. "Purchasing a big box asset allows for largerallocations of dollars in one transaction and therefore justifieswhat the buyer is most likely trying to accomplish – immediatepassive income."

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Sobelman says investors forget that these assets with big-boxtenants are not bonds – they are real estate. "It shocks me to seehow people have worked their entire lives and when they are in the50s, 60s and 70s, the typical age profile of a net lease propertyowner, they follow the 'shiny object' and not the betterinvestment," he says. Companies, such as Earth Fare and Lucky'sMarket, were perceived as "safe" by investors until they weren't,according to Sobelman. "Some investors, developers and landlordsincur the inherent risks of ownership based solely on the tenant'slegacy market perception," he says.

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If that legacy tenant does fail, landlords can face difficultyreplacing them. "Vacant big box assets, or any vacant assets are nolonger even close to the nature of their initial state when theywere purchased by the owner," Sobelman says. "They are largefootprints in contracting business models that still require taxes,insurance, and possible mortgage debt to be serviced without anyincome. Additionally, repositioning a big box requires a healthyamount of free cash that typically comes from thelandlord/owner."

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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.