Shopping Centers Today

DEC 2016

Shopping Centers Today is the news magazine of the International Council of Shopping Centers (ICSC)

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88 S C T / D E C E M B E R 2 0 1 6 "The REITs and pension-fund advisers are focused on the major markets," he said. "The nontraded REITs have not been as active. Private investors are most active in the $2 million to $10 mil- lion single-tenant net-lease deals." Net-lease retail investments remain popular for auto-parts stores or fast-food franchises, he says. "Net-lease is easy to understand and manage," he said. "A fair amount of apartment sellers are buying net-lease retail be- cause they no longer want the headaches with apartments." Two important issues with single-tenant net-lease assets are tenant creditworthiness and the lease term. "With net-lease, buyers are focused on tenant credit, [the] remaining obligated lease term and asset location," said Powell. "Walgreens, CVS and McDonald's are examples of popular investment-grade tenants in this sector. The majority of net-lease investors are looking for a minimum lease term of 10 years, with a prefer- ence for lease terms of 15 to 20 years." Both issues are important with regard to financing. "The credit of the tenant backing the lease has become more im- portant, especially with the commercial-mortgage-backed-se- curities lending market," said Powell. "To get favorable nonre- course lending, one typically has to have an investment-grade tenant on a long-term lease. Many of the deals in the $5 mil- lion range or higher are CMBS-financed; $1 million or $2 million deals typically get bank financing, or buyers pay cash. We're seeing a lot of people pay cash, especially under $3 million." In addition, having a significant lease-term obligation is vital to this sec- tor, as it attracts passive, risk-averse real estate investors, Powell says. The box itself is of some importance. "I prefer the auto-parts and paint stores, with a 6,000- or 7,000-square-foot rectangular box," said Imbrie. "Right now you might have a great credit tenant, but in 15 years Sherwin-Wil- liams moves — that's an easy property to reposition. I'm less excited to put my client into a Sonic [drive-in restaurant], for example, which has a specific build- out that only works for it. I would only suggest a client purchase a Sonic with a cap rate that justifies the risk." There is one caveat when individ- uals buy shopping centers, notes Im- brie. "Some investors attempt to turn multitenant shopping centers into cou- pon-clippers by handing the reins to a management company, which sends a monthly management report," Imbrie said. "Too often the report is thrown directly into the circular file without be- ing reviewed. However, it is imperative the owner review the reports in detail so they understand future capital repairs or if tenant issues need to be addressed." In any case, the net-lease and high- net-worth combination is a good mar- riage, according to Jim Costello, a senior vice president at Real Capital Analytics. "High-net-worth investors don't have billions in their pockets to invest, but tens of millions," said Costello. "So buying a net-lease prop- erty is a good option." n MCDONALD'S, ANYONE ?

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