In March, New York City-based Capital Lease Funding joined the ranks of public companies with a 20-million-share IPO priced at $10.50 a pop. The move catapulted the REIT, which has logged $2.5 billion in net-lease transactions since 1996, from what CEO Paul H. McDowell characterizes as an “intermediary” into a full-blown player trafficking in both the debt and equity sides of the marketplace. It’s a unique niche in the net-lease space, McDowell stated, and in a recent interview with, he explained why. In that interview, which took place in the days following his participation in Real Estate Media’s RealShare Net Lease Conference, he also shared his thoughts on why IPOs are popping up like weeds in spring, why he’s so bullish on the net-lease market and why that enthusiasm doesn’t quite extend to tenant-in-common plays. (This is the second of a two-part series.)

To keep up with the latest net-lease news, click What were the specific drivers of your IPO?

McDowell: As we built our company, we built an origination network that showed us a lot of product that we just were not capitalized to take advantage of, whether it be debt, equity or mezzanine-type investment opportunities. At the end of the day we were an intermediary—despite the fact that we put product on our balance sheet, which made us different pretty much from all the other intermediaries out there. We would originate the product, own it on our balance sheet and then sell that product and recycle the capital. That requirement to resell dictated that we make judgments that made both economic and underwriting sense and that also would make sense to a buyer. There’s not a single player in the net-lease space that’s active on both the equity and debt sides of the business. We determined that if we could get ourselves appropriately capitalized and move from being an intermediary with a gain-on-sale business model to a portfolio model we would see a strong competitive advantage. You’re saying that there was no competition in that space? Why?

McDowell: Good question. We think about capturing net-lease cash flows however they’re presented to us. If an owner comes to us with a sale, we want to buy that asset and capture the net-lease cash flow as a rent payment. If the owner wants just a loan, we’ll capture that credit tenant’s cash flow–his rent payment–as payment on a loan. Now, a lot of people come at the net-lease business from the classic real estate point of view–either as an owner or a lender. What they don’t see is that, with net-lease cash flows fixed for many years, the difference between being an owner and a lender is slight. We say we can do both. Why is there such a trend toward IPOs now–at this time in the economic cycle?

McDowell: There’s been a fundamental shift in the way investors look at investing their capital. They’re favoring fixed-income investments, companies that pay dividends. That’s why the REIT model is interesting, particularly to aging baby-boomers who want to know what kind of income they’re going to get from their investments. At RealShare Net Lease your panel seemed less bullish on the prospects for the market than other panels. What’s your take?

McDowell: I’m much more on the expanding-market side of the equation. Our panel was almost exclusively intermediaries and lenders, who have to fight for every deal. Like any broker anywhere, they always say business sucks. On the other panel you had the owners who were expressing their long-term commitment. I think the intermediaries are a little nervous about what they’re seeing–more sophisticated, permanent capital entering the marketplace–and they feel threatened. CapLease Funding is a good example of that. We don’t need some of these intermediaries to introduce us to product. It’s being shown to us already. You don’t see some people–non-institutional types–packing their bags at some point?

McDowell: No. I was frankly amazed at the number of attendees at your conference. I remember speaking at that sort of event three or four years ago when there’d be 10 people in the audience–and five of them were panelists waiting to go on. And how many of those do you think will be in the audience five years from now?

McDowell: The net-lease market is here to stay, and there’s no reason why it wouldn’t; the economic model is a good one. But you can look at the edges of that model and ask if the tenant in common things make sense. Do they?

McDowell: While I haven’t looked at them that closely, on the surface they don’t appear to make that much sense, except for 1031 investors with difficulty finding product when they want to do an exchange. I’m always leery of any structures that have as a component a very large sales load to the promoter. I was sitting in the audience and someone said that those loads can be from 15% to 40%. That’s an enormous financial drag to overcome in any investment. And it seems to be the type of situation that’s ripe for abuse. But advocates are talking about standards and practices.

McDowell: I would hope. No way is this a forward looking statement, of course, but where will CapLease be in a year?

McDowell: I can answer that from 30,000 feet. We have raised $240 million, which we intend to deploy on a leveraged basis into the net-leased marketplace. We hope that in several years we will have grown our asset base into the billions of dollars.

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