Triple Net Lease, A New Real Estate SectorThat Is Attracting Attention
Decreased occupancy and rental rates as a result of the pandemic have made it more challenging for real estate investors to find stable income. Despite today’s challenging real estate investing environment, the net lease sector has proved to be resilient in terms of stable occupancy and continued cash flows throughout the pandemic.
We interviewed Yoshiko Nakamura, Vice President of Hodes Weill & Associates, a global capital advisory firm specializing in real estate and real assets, and an expert on the global real estate industry, about the structure of triple net leases and their investment merits.
This article has been translated to English from its original publication in Japanese. The article was first published in AL IN on February 28th, 2022. https://al-in.jp/8115/
Q: First of all, could you provide an overview of the net lease sector and explain what a triple net lease is?
A: In a net lease agreement, the tenant pays operating costs and capital expenditures such as real estate taxes in an addition to rent. Depending on the prescribed costs that the tenant will bear, these leases can either be classified as a double or triple net leases. A triple net lease is usually a lease contract in which the tenant bears many of the costs normally borne by the property owner, such as repair & maintenance expenditures, insurance, and taxes.
Net lease agreements are commonly structured as a “sale-leaseback agreement” in which a company sells its owned real estate asset to a third-party fund or investor who then leases it back to the company as a tenant. This allows the company to continue to use the real estate asset while simultaneously unlocking substantial capital through the sale, which can then be redeployed for other more core business uses.
A new long-term lease is typically structured as part of the sale-leaseback transaction, allowing the new owner to benefit from long-term contractual rent payments, without the variance of property expenses, which are passed through to the tenant. Additionally, the leases are often structured so that tenants are obligated to continue paying rent over the life of the lease, even if they choose to vacate the property before the lease term is up. These elements make it possible to maintain highly predictable net cash flows over a long period of time.
Q: Could you please tell us more about the performance of net lease real estate?
A: Net lease strategies have maintained stability across multiple real estate cycles. If you look at the quarterly changes in the NOI of investments across different sectors during the Global Financial Crisis, the NOI Index’s for the office, apartment, retail, and industrial sectors significantly declined during this period as a result of reduced occupancy rates and falling rents. During this same period,
the NOI index for net lease investments, backed by long-term contractual cash flows, remained stable.
Similarly, net lease REITS proved resilient during the pandemic, outperforming REITS from other sectors over the same time period. Additionally, in the current rising interest rate environment, listed REITs may be volatile. Private funds, on the other hand, are less sensitive to market volatility, while still enabling investors to benefit from the long-term contractual cash flow nature of
net leases.
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