Lenders Continue to Favor Net Lease Assets

Lenders Continue to Favor Net Lease Assets

The year appears to be opening with a strong outlook among lenders, suggesting that those seeking to finance net lease transactions will have ample options for making deals happen.

CMBS lenders are reentering the market, according to observers, after a year or so of a cooler approach to unrated triple net lease properties. They’re now expanding their parameters to include more triple net properties.

A panel of market pros told Commercial Mortgage Alert that they predict commercial MBS issuance will grow by 34 percent this year. U.S. CMBS issuance reached a post-crisis high of $48.2 billion in 2012. Conduit lenders are more optimistic and believe the market turned a corner in 2012, according to CMA.

Concerns about the European debt crisis prompted lenders to charge higher rates last year, but they’re now dropping. Standard & Poor’s also revised its ratings methodology in September, which allowed securitization programs to offer lower rates and write larger loans. Furthermore, low spreads are allowing CMBS to compete with renewed vigor against portfolio lenders, as they extend lower rates to borrowers.

Meanwhile, banks and life insurance companies also expect a strong year with a view that real estate has stabilized since last year. However, they face a more competitive landscape given the resurgence of CMBS lenders.

In the net lease sector, a single tenant, triple net lease developer often works with a construction lender that will lend 80 percent loan to cost. Bigger developers will take advantage of one or two institutional investors to back the equity in the deal.

Among REITs in net lease, both off- and on-market transactions are occurring, according to Brad Thomas, vice president of capital markets for Bull Realty in Atlanta. REITs are trying to get closer to the development process as capital chases new product in initial stages of construction, he says.

Net lease owners generally have two options for financing, says Bill Hughes, senior vice president and managing director at Marcus & Millichap Capital Corp. in Irvine, Calif. If the credit tenant has an S&P rating of B minus or higher, the owner can execute full credit underwriting with a fully amortizing loan at attractive rates, depending on the tenant’s credit, Hughes says.

With a non-credit tenant, the buyer’s options depend on a range of factors, including the tenant, their operations, the market, and whether the building is a special-purpose facility.

Buildings with very specific functions, such as restaurants or preschools, can be harder to finance, according to Hughes, whereas more adaptable facilities such as warehouses pose less of a challenge. Creditors will consider whether the building could be modified to suit other purposes in case a tenant vacates the property. An underwriting rate can be set based on the market rate of a property were it to go vacant.

Financing may range from 60 percent up to 75 percent on a building with a more general purpose but that still hosts a single tenant, according to Hughes. In the case of a credit tenant net lease deal, financing might go as high as 90 percent with standard underwriting, given current rates.

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