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Due to the rise in real estate investors performing 1031 exchanges,
Net Leased properties has become an increasingly well-known mechanism to cover
an investor's need for replacement property. Typically, the deals are structured
with long-term, absolute net leases, which offer the most hands-free ownership
to any purchaser.
Absolute Net Lease: All management, maintenance, repairs, capital,
environmental, condemnation, and casualty responsibility belong to the tenant.
The tenant's responsibility level can vary from deal to deal and should be carefully
analyzed. The value of an asset is affected by the nature of the lease structure.
As the tenant's responsibility goes up and the landlord's goes down the value
of the property should go up.
Long-Term Lease: The lease term will generally run from 10-25
years. Generally, the property value increases as the lease term increases.
High-Credit Tenant: The product type has historically been high-credit,
single tenant. The credit rating is called Investment Grade and is set by rating
agencies such as Moody's and Standard & Poors. The higher the credit, the higher
the property value, because the likelihood of tenant default is lessened (see
Default Risk graph above).
Single-Tenant Properties: Properties with only one tenant generally
require less management and allow for the absolute net lease structure. These
qualities create a more value and a more desirable product, which is more easily
resalable.
Price Ranges: Single-tenant replacement properties have various
ranges in value. Given that an investor can defer gain on his sale through 1031
exchanges, the market is deeper for smaller buyers with replacement needs of
$500,000 and up.
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