Should I be investing in Triple Net Leases during these turbulent financial times?

In a market where the treasury desperately intervenes to shore up Fannie Mae and Freddie Mac, and banks are becoming more cautious by the day, investors need to keep in mind that this is still a buyer’s market.

By: Shawn Givens – BMC Mortgage, specializing in triple net property loans

I receive a phone call at least once a day from a client asking whether the net lease market has bottomed out yet and if they should buy triple net leases now or wait until the market turns around. While interesting, the call has become all too familiar to me. I usually reply to their question with a question. My core enquiry to any net lease investor is what they are trying to accomplish with their NNN investment and based on today’s financial markets do the numbers allow them to reach their goals? Once I run the numbers with them, their answer is typically, “yes, the numbers provide me the returns I’m looking for.” I looked back at some loan advertisements from the 90’s, and I found it interesting that brokerage shops were advertising rates as low as 8.5-9.0% as extremely aggressive. In the meantime, today we are still financing quality triple net leases as low as 6.25% for a five-year fixed term. Thus, while loans might be more difficult to obtain than in recent years, on a historical basis the triple net lease market still offers excellent terms that allow buyers to be very happy with the end results.

Any net lease specialist will tell you that it is not rocket science to check that the cap rate on a triple net investment offsets the current interest rates with enough surplus to provide the client their target rate of return. As long as sellers and buyers are realistic in their expectations, then the numbers typically still work on good quality deals and loans are closing. In the NNN real estate world we know today, it is commonly understood that the banks that are still financing triple net leases are more stringent regarding what asset types and quality they will lend on and terms offered. The days of 80% financing and interest only loans on triple net properties are becoming a thing of the past. Some of the tenant size requirements and tenant qualifications of a year ago are more difficult to obtain financing for with today’s new lending standards. This seems to startle net lease investors. In reality, the extremely high leveraged triple net investment deals and interest only financing are very unusual practices in the history of commercial banking. In the scheme of things, the rates being offered today are still attractive and allow triple net investors excellent returns.

I was recently asked about the Fannie and Freddie bailout. Most would say it is a necessary move by Treasury Secretary Hank Paulson to help the economy. But I believe it is not for the reason many people think. This move isn’t a bailout for the home buyers in states such as Florida or California who have lost their homes due to an unfortunate foreclosure. The real purpose of this move is to keep the central banks of China and the other various investors in U.S. Fannie and Freddie debt selling their government agency bonds and increasing the cost of home financing for years to come, which could potentially throw the U.S. economy into long term disarray. There are many articles written on the topic that are very informative. The basic hope is that if this move works as planned, the foreign debt holders will be enticed to buy the newly guaranteed Freddie and Fannie debt, thus driving down the yield that must be paid as enticement. The end result could be a significant reduction in the U.S. home mortgage rates.

This is a unique lending market that poses many difficulties to potential triple net property investors that are seeking financing on their projects. The key thing to remember is that this is still a buyer’s market and there are very good real estate triple net leases out there. Speak with your real estate agent about your goals. If all parties to a transaction have realistic expectations, then the required returns are very obtainable.

Thank you and happy buying. I’m looking forward to working with you to secure financing on your future triple net leases.

About the author: Shawn Givens is VP of BMC Capital who specializes in providing loans to investors acquiring triple net lease properties. For a free financing quote call him at (214) 432-1069 or his cell at (214) 274-1069.