debt rating may tend toward ownership. “Here, using cash is
viewed as merely a reduction of invested funds earning nominal
returns or the use of a low-cost corporate debt facility, compared
to a rent factor on a lease,” he observes. “If a company can bor-
row at, say 6.5%, interest only under an existing credit facility
and the initial rent factor on a new building is 8.5% of the proj-
ect cost, the cost of leasing is apparently higher by 2%.”
But he cautions that this comparison can be misleading.
Since the lease leaves the tenant with no obligation at the end of
the term, “the correct debt metric to compare it to is the debt
constant that fully amortizes the loan over the same period of
time,” he notes, which could dampen any desire to own.
Adding a wrinkle to the leasing landscape, however, are proposed changes to accounting guidelines. In June, the US
Financial Accounting Standards Board and its counterpart, the
International Accounting Standards Board, will issue a draft of
these revisions. The rules, which will not go into effect before
2012, are just now appearing on corporate radar screens.
As it stands now under FAS 13, operating leases are classified as
an off-balance sheet transaction and only the current year operating lease expense is accounted for on the income statement.
Proponents for changing the rule argue that the current standards fail to give an accurate view of a company’s liabilities. But
the upcoming revisions mean that all operating leases will be
reclassified as capital leases, which must be recorded on companies’ balance sheets and treated as a financing transaction on
their income statements.
While these changes do not have a direct effect on cash flow—
As corporate space users continue to shy
away from buying, increasingly investors are
picking up the slack, points out Peter Snell of
Marcus & Millichap Real Estate Investment
Services’ Net Leased Properties group in
Washington, DC. A shift in prices, as well as
cap rates that have dropped by 30 to 50 basis
points, depending on whether it is a single-or multi-tenant property, are responsible for
the change in demand, he adds. “We recently
sold several Walgreens stores inside DC and
in Alexandria, VA that had been sitting on
the market for about a year.” Snell and colleague Kirk Knight recently listed a
McDonald’s ground lease in Rockville, MD
for $2.3 million—a rarity as the retailer usually buys up the few net-leased properties it
doesn’t already own. Snell says he expects
several full-price offers.
Investors, for the most part, can be divided
into two groups, says Shields—portfolio and
institutional buyers who purchase properties
worth more than $15 million and retail
investors who dole out their dollars to less
pricey sites and tap into the 1031-exchange
buyers. He is also starting to see more individual investors scooping up shares of public, non-traded REITs or publicly traded
REITs that focus on long-term, single-tenant
net-lease assets. In fact, Griffin’s own GC
Net Lease REIT is now targeting long-term,
single-tenant net-leased office and industrial assets because of their risk-adjusted
To learn more about our real estate advisory services and investment opportunities, visit
usrealtyadvisors.com or contact Jack Genende, David Grazioli or Matt Snyder at 212.581.4540.
