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Michelle Napoli is editor of Net Lease forum, from which this article is excerpted.

In a net lease and sale-leaseback market with many new entrants, New York City-based US Realty Advisors LLC stands out as a stalwart of the business, focusing on this niche since 1989. NET LEASE forum recently spoke to chairman and managing partner Richard H. Ader about the company’s recent activity and the trends in the marketplace.

NLF: We don’t often see transaction news from you. So to start, can you give us a sense of what business was like for US Realty Advisors in 2006?

Ader: The last year-and-a-half have been pretty strong for us. This year we’ve closed about $300 million and we have another $500 million or $600 million in the works, which are pretty big numbers. Last year was not quite as good as we expect this year to be. Off the top of my head, I don’t have last year’s numbers, but my guess is it was around $600 million or $700 million. And if we look back to 2005, it was probably half of that, if that. So I would say in the past year-and-a-half, our volume has picked up dramatically.

NLF: Why do you expect this year to be so active?

Ader: I don’t know if this is true across the board, but there seems to be more complex deals, which means more negotiated deals as opposed to auction deals. There’s always some form of auction, but I’m talking about wide auctions versus talking to two or three people. And we tend to be better with the more complex transactions. If it’s a simple A-B-C transaction, there seems to be a lot of people willing to pay extremely big prices. We just closed a transaction that was about $120 million and it was very complex. It has taken about nine months to get done. Because it’s a private company, the complexities tend to be in how you control the company and the individuals. There tend to be issues that relate to lenders, and unfortunately, we got caught right in the big jump in interest rates. And then, in the middle of all this, somebody wanted to do a 1031 so that complicated it a little bit. It had lots of issues.

NLF: What’s causing an increase in these more complex deals?

Ader: I think what’s happened is that our industry, meaning the corporate real estate industry, has become more accepted as a vehicle for corporations to raise capital or divest themselves of real estate. Also, instead of the basic, run-of-the-mill, ‘OK, I want to raise capital and sell my real estate,’ you tend to get into the middle of lots of different issues because there are more sellers. Not necessarily more sellers than buyers, because I don’t know if that’s true or false, but definitely more sellers of corporate real estate. I think a lot of it was triggered by Kmart and all that stuff that went on, where Wall Street was giving a lot of attention to how many corporations are very long in real estate. I think it’s just a matter of a marketplace, like any other marketplace, with simple deals, somewhat tough deals and very complex deals. And sometimes it’s just structure. For example, one of the issues for a selling corporation that’s owned real estate for some period of time is they have tax to pay on the sale. That’s always an issue because they’ll be netting less than the gross proceeds, they have to take taxes out, but they’re going to be paying rent on the gross proceeds. So, how do you make that work? That tends to be an issue as well.

NLF: Any other market characteristics or trends that you’re paying attention to?

Ader: One thing that’s clearly on everyone’s mind is cross-border transactions. Whether it’s Europe, Mexico or Canada, everybody thinks there are opportunities there. We’re in the process of doing a deal in Europe right now. Once again, a very complex transaction, but it has size to it, it’s over $100 million. We’ve done several in Mexico, but that will be our first in Europe. There’s a lot of opportunity there, but you need to have your legs on the ground to some extent or be represented over there, because I think it’s very hard to do transactions when you’re so far away. But I do think there are opportunities there, and in some of the countries many of their leases are equal to or better than our leases. Their cap rates tend to be lower, but their escalations tend to be better. And depending on what type of capital you represent, you can also do a euro transaction or a pound transaction–you do it in different currencies, and that’s an interesting hedge for the dollar investor. The transaction we’re doing is a euro transaction. The negative on it is your exit is different. Many people look at 1031s as an exit, but you can’t use it as a 1031 overseas. But if the transaction is structured so you’re getting a nice return, some day you can sell it for the return.

NLF: Anything else in the domestic sale-leaseback market you’re seeing?

Ader: On the negative side, things are starting to trade far in excess of replacement cost. That’s a danger sign, although right now it doesn’t seem to be stopping anybody. But when you see distribution centers trading for over $100 a foot, you’ve got to shake your head and say, ‘Boy I hope the credit stays good.’ Citibank has been to the market a couple of times with some fairly big transactions. There are other transactions, whether they’re retrades or new, coming to the market, and some fairly substantial deals, which I think is a good thing. You’re also seeing buyers teaming up– more than maybe you’ve ever seen before. There are net-lease buyers looking at these bigger transactions and not wanting to have the concentration, so they team up on pools. We’re teaming up with somebody on a pool. And we’re not the first.

NLF: On your investor client side, any particular trends or changes that you are seeing in the net lease sector?

Ader: We’ve kept ourselves pretty consistent with our clientele because the people we invest for have been with us for a while, and we’re not looking to expand because the market is so tough. You could go three or five months without buying something, and we don’t like to be put under pressure to put money out. So the people we deal with we’ve dealt with for some time, and they’re satisfied with our performance. So we’re not looking to expand that at all. But there are a lot more people continuing to enter our market.

NLF: Does that surprise you?

Ader: It surprises me and it doesn’t surprise me. It surprised me that it’s taken them this long. I’ve always felt that this form of real estate investing is smart; you’re buying a corporate bond with security. And if you’re good at what you do, then you’re really buying a better piece of paper than the corporate bond, with more upside, more yield. So it surprised me that it was for so long that many of the investment houses that were bond buyers never looked at the equity side of a net lease; they would look at the debt side. Now they’re looking. And even people who had real estate arms that would look at net leases and say they don’t provide the returns are seeing that they really do. I would say almost all of the opportunistic funds are doing some form of corporate real estate, whereas 10 years ago they would pooh-pooh it. It’s becoming a much wider market and crossing a lot of different lines.

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