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There is more than one way to capitalize net lease deals.

By Josh Pardue

Many people think net lease transactions are fairly cut-and-dried–that the properties and procedures involved are standard and do not vary much. In reality, net lease transactions have become far more diverse than they used to be due to lease restructures, small-cap company credit underwriting and more creative deals. Developers are aggressively pursing single-tenant projects that they can build-to-suit for a tenant looking to enter into a net lease.

Brokers across the country are working to raise money for build-to-suit projects where the developers have zero co-investment. Additionally, brokers are able to get pursuit costs reimbursed out of the first draw by structuring a joint venture in which, at the end, the property is sold to a trade buyer who becomes the long-term, stabilized owner. The developer typically earns half of the development profit–sometimes more– without having to rely on local bank guarantees and “friends and family capital.” The equity partner gets extraordinary  risk-adjusted returns with a fully executed long-term lease from a strong credit tenant. There are three main options for capitalizing net lease developments. The most common scenario is the waterfall equity structure described above: a joint venture with an equity partner who eventually sells the stabilized product–usually to a 1031 exchange buyer–at a significant profit.