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REVIEW SUMMARY
Company. Calkain Cos.
Industry. Net lease properties
Key. Better returns on smaller investments
Seasoned investors needing a counter to the lackluster returns of stocks, bonds and cash equivalents now have another option to consider.
And just like a possible remedy to a health ailment, they may be able to find it at the corner neighborhood pharmacy.
The potential fix: Triple-net, single-tenant leased commercial real estate. The investment is being promoted as a fourth asset class in an optimal portfolio, particularly for older investors more interested in monthly check returns over long-term capital gains. Even smaller investors are being allowed into an area once dominated by real estate investment trusts and other institutional groups.
“They want cash flow, they want stability,” says David Sobelman, executive vice president of Calkain Cos. in Tampa. “They may not be full-time real estate speculators.”
Reston, Va.-based Calkain has been connecting investors with net lease properties for the last five years.
These types of properties, mostly occupied by national pharmacy and restaurant chains or even doctor's offices, are currently outperforming other commercial real estate sectors such as office, industrial and hotel. The returns are better lately than those for commonly acquired stocks, which have performed negatively over the last decade.
Advantages aplenty
An upcoming report by Calkain's Tampa office shows that net lease capitalization rates have stabilized at just above 8% in recent years, similar to REIT returns. Compare that with equities, which have brought a negative 2.7% return since 2000, or Treasuries, which have basically dried up in the new millennium.
As investors turn to fixed and passive income vehicles, they have gone into bonds in record numbers, putting at least $90 billion into bond mutual funds earlier this year, Calkain reports. But while the typical moderate investment portfolio may put 65% of assets into equities, 30% into bonds and 5% into cash, Calkain recommends converting 20% to 30% into net lease properties at times when other markets don't perform as well.
Sobelman, a Sarasota native and University of Florida graduate who worked at the White House during Bill Clinton's presidency, lists several advantages to owning net lease real estate.
For one thing, tenants, rather than landlords, are responsible for upkeep and maintenance of properties. Also, high-credit tenants such as Walgreen Co. and McDonald's Corp. are far more likely to honor long-term lease obligations whether the economy is good or bad.
More importantly, investors can see and enter what they bought practically anytime, whether it's a local asset or one clear across the country. Sobelman says net lease owners should look on their properties at least once a year, though Calkain offers to do it for them in long-distance situations.
Sobelman says net lease is ideal for high net worth investors who prefer passive income, generating re-investment income and providing tax benefits with little to no responsibility. It's also good for estate planning purposes, since properties can easily be passed on to heirs.
Tenants pose risk
Like any investment instrument, of course, there are risks, especially where the livelihood of tenants is involved. For example, Blockbuster Inc. and Hollywood Video were once viewed as rock solid when people preferred renting movies on VHS and DVD, but those stores are closing as film buffs move toward vending machines, home mail services or direct-to-TV reception.
However, even those concerns may be minimal. Sobelman points out that most of these video shops were developed in sound locations and buildings, making them a good choice for other types of retailers demanding high visibility on heavily traveled streets. One such property was recently re-leased to a bank, he says, while another became a wireless phone showroom.
“It all comes down to real estate,” he says, noting the industry's constantly cyclical nature. “Even if you buy the best credit tenant, you always want to have the best location.”
Another potential hurdle: The price of getting in on a net lease deal depends on the investor's ability to pay or borrow, combined with the going price of an asset. For example, some properties in thriving downtown areas across the country have gone for as high as $1,000 per square foot.
“Investors are returning to the market and the time is right for urban investments,” says Rick Fernandez, Calkain's managing urban investment advisor in Reston. He adds that quality triple-net properties are hard to come by in the current market, especially in the $1 million to $5 million range sought by average investors.
Still, prices may be a bit cheaper along the Gulf Coast where properties are available. In May, Calkain handled the sale of a 14,560-square-foot Walgreens store at 1700 Lockwood Ridge Road in Sarasota for $5.4 million, or $371 per square foot, to a private investor from Smithtown, N.Y. The building, which opened late last year, has a 25-year lease with an option to renew for up to 50 years.
On the lower end of the spectrum, Calkain points out that Dollar General Corp., which is benefiting from the recession, has stores priced from $500,000 to $1 million. But those are mainly situated in lower-income neighborhoods or small rural towns where rent revenue isn't as highly generated.
For those with far less cash to invest, more options appear to be opening to net-lease properties. New York-based Iridium Capital, for example, has introduced a hedge fund for first-time investors with a minimum ante of $50,000.
“We really wanted the investors to become well versed and comfortable with this particular aspect of real estate, one that we felt it was time they learned about as a more prudent real estate investment than so much of what they've been hearing about,” Iridium founder Marilyn Kane told GlobeSt.com in a recent interview. She added that the fund is expected to attract “mini-moguls” yet is open for much higher investment levels.
Calkain Cos. offices are largely situated in the East Coast, yet its Tampa office is far removed from that cluster. There are a number of good reasons why.
David Sobelman, Calkain's executive vice president who hails from Sarasota, opened the local office in 2006 after helping start the company the previous year. He and Jonathan Hipp, president and CEO, worked together with another commercial real estate firm in Washington, D.C., for a few years before deciding to start their own operation to strictly handle net lease property investments.
Calkain has since handled more than $3 billion worth of those transactions and grown to four offices with a dozen brokers, plus support staff. Sobelman now has three other colleagues in Tampa — Patrick Nutt, senior associate and research analyst, and associates Guenter Manczur and Teal Henderson.
Operating with no comparable local competition, Calkain is quietly building an empire in net lease sales throughout the Southeast. Florida seems to be the optimum site for these types of opportunities because of its dense population and the presence of retirees and other investors with high net worths.
“Florida has a cache to it because there's no state income tax, and people love that,” Sobelman says. He further observes that so many people with second homes along the Gulf Coast want to be able to invest in other types of commercial-grade properties nearby and net lease is the most viable option.
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