- What is a "net-leased property"?
- Why Don't
these companies buy the buildings themselves?
- What is "investment-grade"
credit and why is it important?
- How do you determine if
a location is good?
- Who should own Investment Grade Net
Leased Property and Why?
- Why should an investor choose Joseph
E. Kean Company?
1. What is a "net-leased property"?
A net-leased property is one for which a tenant agrees to lease a property on terms
that require the tenant to pay ALL expenses associated with the operation of the
property including taxes, insurance, maintenance and utility charges as “additional
rent”. This relieves the owner/landlord of the obligation to pay operating expenses
of the property
2. Why don't these companies buy the buildings themselves?
The “net-lease” is a financing option for these companies. Companies that are in
a program of rapid expansion do not want to tie up their capital in real estate
and thereby limit their ability to expand. Secondly, most of these companies can
earn a higher return on their money in the operation of their businesses than the
cost of the lease payment for the locations. In this way, they can maximize their
profit and their stock values. Lease financing is not reflected as a liability on
the company’s balance sheets in the same way as debt. So this further improves the
company’s attractiveness to stock analysts and investors.
3. What is "investment-grade" credit and why is it important?
Investment-grade credit (S&P rated AAA to BBB- or Moody’s AAA to Baa3) is essential
in assuring a secure income stream and the long-term stability of your investment.
It is a guide to the ability of the tenant to honor the lease contract for the full
term. It gives us the ability to finance your property without obtaining your personal guaranty for repayment of the loan. In addition
to ease of financing, higher ratio loans (loan to value or LTV) are usually available
for investment grade properties and the interest rates are usually lower. The liquidity
of your investment is also improved by reducing a potential purchaser’s concern
about the factors listed above. While the creditworthiness of the tenant is critical
in the decision-making process, Joseph E. Kean Company never forgets that
this is a real estate investment and as such, the intrinsic
value of the underlying property is still the key to the long-term security of the
investment.
4. How do you determine if a location is good?
This is the point at which the investment selection process goes from science to
art. In an investment in which a tenant has unequivocally contracted to lease a
property for an extended term (15 – 25 years), the immediate value of the
tangible property is of secondary importance. We are tasked with the responsibility
of attempting to forecast the likelihood of stable, and preferably appreciating,
property values. A very important step is to invest in metropolitan areas with high
growth potential. In these markets almost every well-located property will benefit
from the general growth trend. Then, it is important to do a demographic study to
determine the economic climate in the immediate vicinity of the property. If the
area is, and is projected to continue, adding population with a growing average
household income at a rate equal to, or above, the national average; if there
is sufficient population density; if sufficient employment exists; and there is
sufficient pedestrian or vehicular traffic, the area can justify an on-site inspection.
The on-site inspection is vital in confirming or refuting the opinion of the location
that the due-diligence work has generated. This process requires a significant investment
in time and patience. The major arterial streets must be “driven” to determine the
“stage of development” of the general area. Discoveries of facts that conflict with
previous indications require deeper investigation and create a series of new questions
that must be addressed. Personal interviews with managers of other businesses in
the area can reveal many things not apparent from statistics or casual observation
alone. No short-cuts can be taken at this stage of the evaluation process.
5. Who should own Investment Grade Net Leased Property and Why?
Investment grade, net leased properties are ideal investment vehicles for people
with a need for secure, predictable investment performance without foregoing the
potential for capital gains. Compared to “fixed-income” instruments such as corporate
or U.S. Treasury bonds, the current income is comparable or superior. However, there
are some tax benefits that can improve the “after-tax” current return to surpass
bond rates. Additionally, the retirement of indebtedness, or amortization of the
financing, provides a secondary- and reliable - benefit. Although one cannot
predict future values – especially when the investment horizon can be for 15 to
25 years – property values have historically shown a tendency to increase.
This combination of benefits makes investment grade, net leased properties an excellent
choice for people who have clear financial goals because the structure of the investment
can be modified to achieve their objectives including, but not limited to, retirement
income, funding college educations (or other future events) and even estate planning
goals.
If the total investment required exceeds an individual investor’s available cash,
it is sometimes possible to purchase partnership interests in these investments.
Contact Joseph E. Kean Company to check the availability of these opportunities.
Possibly the best suited group of investors for investment in investment grade,
net leased properties are those wishing to divest of an appreciated property but,
do not want to lose a large portion of their gain to capital gains taxes. These
properties are THE ideal “tax-deferred exchange” vehicle.
Property owners who wish to be relieved of the risk of increasing property operating
expenses and the burdens of property management can relinquish their current property,
or properties, and exchange the equity for a net leased property. By doing this
their tax obligation is deferred indefinitely, their management obligations and
tenant liabilities are terminated and yet, they have all of the benefits of a secure
investment and property ownership. This process, while rigorous, is easily accomplished
by professionals familiar with the procedures required under Section 1031
of the Internal Revenue Code.
6. Why should an investor choose Joseph E. Kean Company?
Investors who are serious about controlling their financial destiny should seek
the assistance of a professional that not only has the skills and experience to
analyze and understand the intricacies of property investment but also, one who
will closely identify with them and dedicate himself to the achievement of their
objectives. Joseph E. Kean Company has been active in assisting investors to acquire
net-leased investments since 1976. We have assisted in the acquisition of a portfolio
of net-leased properties for a foreign-owned corporation that covered eight states
and managed the oversight of these properties for over twenty years. We have also
worked with many individual clients to assist them to invest in net-leased properties
and to complete Section 1031 exchange transactions. We invest the time necessary
to know our clients so that we have a clear understanding of “why” they invest and
“what” the investment is meant to do for them. Only then do we begin the process
of selecting the best available properties for them. Joseph E. Kean Company has
the experience and depth of understanding required to structure clients’ investments
to achieve the desired objectives.
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