Passive commercial real estate investment is in, and broker Will Lightfoot is out — putting deals together all over the country.
He’s not the only one. But Lightfoot, a broker with CB Richard Ellis-Oklahoma, is one of a handful of brokers in Oklahoma specializing in the niche property market. Such deals often underlie the development of Taco Bell, Jack in the Box and other national restaurants, as well as drug stores and other retail and service store chains.
The deals often are relegated to footnotes of a local property market: single-tenant, net lease sales. That means an investor or investor group buys a property with a single national renter — say, a Taco Bell — signed to a long-term lease. The credit of the tenant and the income from rent give the investment more value than the real estate itself.
Such deals often go unnoticed because often most or all the players in a transaction are located outside the place of the transaction. For example, a deal Lightfoot brokered not long ago in Mustang involved a landowner who sold to a developer out of Texas who built and leased to Jack in the Box, and a buyer in California. Lightfoot represented the developer-seller.
“It’s a national market. It’s not unusual for the buyer, the seller and the property to be in three different states,” he said.
It’s not just about burgers and tacos, though. Last year, Lightfoot brokered deals involving a Buy For Less, a Dick’s Sporting Goods and an industrial lessee — as well as a McDonald’s, 7-Eleven and Panera Bread. The transactions were for properties in the Oklahoma City and Tulsa areas, as well as Arkansas, Texas, Missouri, Illinois, Ohio, Florida and California.
“A single-tenant, net lease property is typically described as a freestanding office, industrial or retail building that is leased and occupied by one user or one company. Ideally, the tenant has committed to a long-term lease of 10 years or more with increasing rent over the lease term,” CB Richard Ellis explains on the capital markets section of its website, www.CBRE.us.
Here’s what makes it a passive investment: “The single-tenant occupier is responsible for paying rent plus some or all of the operating expenses of the building such as taxes, insurance premiums, repairs and utilities.” The main job of the investor-owners — often a group or real estate investment trust, but individuals, as well — is to receive rent.
It’s called “mailbox money,” Lightfoot said.
Single-tenant net lease investments are unlike other property investments in another way, according to CB Richard Ellis, which bills itself as the global leader in brokering such transactions: The property’s value “is determined by a combination of factors including the tenant’s credit, the length of the lease and rental escalations over the term, as well as the fundamentals of the physical building and location,” the company says on the website.
Passive equity investments, Lightfoot said, are “attractive to investors who aren’t really traditional real estate investors.”
He said the niche is growing because returns on other long-term, low-risk, lower-yield investments, mainly bonds, have been so slight for so long now — and because they function much like financial instruments. Also, they are national deals and only incidentally tied to the property itself — at least until a lease is up and the real estate itself goes back on the market.
Such investments also are well suited for investors in 1031 tax-free exchanges, in which the Internal Revenue Code, in Section 1031, allows investors to roll over capital gains taxes on series of like-kind investments.
“It’s almost become more like a finance asset than a real estate asset,” Lightfoot said.
Last year, Lightfoot sold 23 properties in eight states totaling more than $55 million — more than $100 million the past four years.
The recession stalled development of these kinds of properties, and recovery now has them in high demand, especially with returns so low, or risky, on other types of investments, he said. Private investors with cash as well as real estate trusts are turning more to single-tenant net lease properties, he said.
“It’s a maturing asset class, almost a necessary component of a diversified investment portfolio,” he said. “There’s more appetite for this type of asset now more than ever.”
It’s a national market. It’s not unusual for the buyer, the seller and the property to be in three different states.”