Just what is Investment Grade Real Estate? Real property that is often included in portfolios of institutional investors such as insurance companies. They are of sufficient size, quality and credit worthiness, often $5 million up, and may include Class A Office Buildings, Retail Centers, Industrial Properties, Motels/Hotels and Apartment Buildings.
These are often Single Tenant NNN (often called Triple Net or Net/Net/Net) properties. This means that you have one tenant in a property that pays the Taxes, Insurance, Maintenance and Utilities and you get a check at the end of the month, and you can count on it being there. Frequently, these are properties that are called Build-To-Suit. A company that does not want to tie up their own capital on real estate, will pay to have a building built for them to their specifications and agree to lease it for an extended period of time. The initial term of these leases often times are for 10 years or more and usually include shorter term options to renew. These can be great deals for an investor, but they come with risks. Some of the key questions that need to be addressed are:
Can they make the payments – are they credit worthy?
Can I build what they want and lease it back at a price that works for all parties?
Will this involve financing on my part?
Will we be able to structure a deal that gives me a reasonable Return-On-Investment based on my Risk?
What is the Capitalization (Cap) Rate? (free & clear return – Net Operating Income divided by my Cost = Capitalization Rate) In today’s economic climate an 8% to 10% Cap is common in many areas of the country.
Will the property be rentable to other businesses or uses if and when the tenant leaves?
Is this in a location that offers upside in the future?
Some of the situations that lend themselves to Investment Grade Real Estate purchases are people coming into large sums of money from inheritance, sale of properties, sale of businesses or accumulation of large sums of cash from investments or earnings. This can also come from owning undeveloped property that is desirable for development because of its location often times in the path of progress.
Some of the types and forms of investments are:
Land lease only – you lease the land – tenant puts the structure on it with his money.
Subordination – you lease the land and allow the tenant to put a loan on the property which puts the owner in second secured position on the property.
Fast food franchises and retailers often like to operate out of leased properties.
Medical facilities can be outstanding investments.
Government buildings can also be outstanding investments. They often times have longer term leases, they are backed by the US Government and they very secure. Often times they are sold at a lower Cap Rate (6.5% – 7.5%).
Investment Grade Real Estate can provide a long term steady income stream with no management hassles that is secured by real estate and a contract (lease) to pay for a certain length of time. These leases often times are structured to hedge against inflation by including periodic increases of a fixed amount or based on an index such as the (CPI) Consumer Price Index.
Depending on your situation, Investment Grade Real Estate can be a key and integral part of an investment strategy for many people.