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The compilation of real estate, credit and lease term has always been the largest question mark of valuing a net leased investment. However, when the debt markets are not providing sound footing and investors are looking for higher overall returns, the one factor that must always be considered is “What is the true value of the real estate?” There was a time when someone could look at a Walgreen’s in a tertiary market and underwrite the value the exact same as a Walgreen’s in Midtown Manhattan. However, while the credit and lease term may be identical, the real estate has drastic differences.

In today’s investment market, that real estate fundamental has moved into first position as it ranks against credit and lease terms. We are seeing once sound companies struggle in this economic cycle and, in some occasions, leaving behind vacant buildings.

Therefore, the questions begin to arise. How strong of a location is a site? What can be done with the land and/or building if the tenant vacates? And what expense may the investor have to incur if a vacancy arises in their once passive net lease investment? All of these factors have become more prevalent in recent times and will most likely stay a large part of investors’ conversations for years to come.

Net lease investing has some fundamental points to assessing risk. Credit, which historically seems to be the most prolific indicator, has numerous sources of data and highly sophisticated professionals that look deep into a company’s balance sheets in order to provide their opinion of viability. However, now that some of these very sound companies are having hiccups in the market, they may readjust their real estate positions in order to get through the thinner times. The credit rating that these companies have acquired over many years may not change at all, but their business model may and that will ultimately affect their location distribution.

When one begins to focus on the intrinsic value of the real estate, they typically look at the investment from different angles. Things to consider; surrounding businesses and competition, traffic counts and patterns, access to the property, value of the raw land, rental rates in the area, construction costs and replacement value, future planned development, residential proximity, major employers and existing infrastructure. All of these elements should be considered when purchasing a net lease property even if the credit of the tenant is extremely high. Combining both the credit and the real estate in one’s underwriting will enhance the likelihood of diverting a potential messy situation in years to come. It may even make sense to pay a little bit of a premium for a very sound location, given the backstop principles of being able to value the real estate for future tenancy and perhaps increased income.

The criteria to invest in net leased investments may change over time. But one fundamental principle that will always be in place is that we are all still investing in real estate. Market cycles come and go, but as the old adage goes: “They’re not making any more land.”

The views expressed here are those of the author and not of Real Estate Media or its publications.

David Sobelman is executive vice president of Calkain Companies Inc. and a member of Real Estate Florida’s editorial advisory board. He can be reached at [email protected]

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