A Net-lease is a lease by which the rent is "Netted out" of the gross operating costs incurred by the tenant. A Net-lease usually means the actual operating expenses and real estate taxes are not included in the net rent.

A.	The IRS Sec. 1031 has become widely used as a tax deferral strategy. There are many professionals that are experts in assisting in 1031 exchanges.
B.	Although the 1031 Tax Deferred Exchange is popular and effective, there are many pitfalls and potential problems which can have significant tax and legal implications. Upland advises all of its clients to contact a tax or legal professional early to avoid any complications.

 

 

Yes. An investor can "trade" via a 1031 Tax Deferred Exchange from any real estate "held for investment" purposes for a Net-leased Property. "Like Kind" although sometimes confusing, refers to the "held for investment" aspects and does not focus on the nature of the real estate. (Please refer to page 19 of the IRC Section 1031 Exchange Manuall provided by First American Exchange Corporation of Minnesota.)

Also, you should consult with your qualified tax consultant, attorney or accountant on all matters concerning a potential 1031 Tax Deferred Exchanges.

Within Forty-Five (45) days after the date of which the Taxpayer transfers (sells) the property relinquished in the exchange. (Please refer to page 19 of the IRC Section 1031 Exchange Manual provided by First American Exchange Corporation of Minnesota.)

Also, you should consult with your qualified tax consultant, attorney or accountant on all matters concerning a potential 1031 Tax Deferred Exchange.

Within 180 days after the date on which the taxpayer transfers the property relinquished in the exchange, or the due date (determined with regard to extension) for the transferor's return of the tax imposed by this chapter for the taxable year in which the transfer of the relinquished property occurs. (Please refer to page 20 of the IRC Section 1031 Exchange Manual

Also, you should consult with your qualified tax consultant, attorney or accountant on all matters concerning a potential 1031 Tax Deferred Exchange.

Real estate investment is a relatively risky endeavor. It can be considered more or less risky depending on may variables. The Net- lease investment is considered by many to be one of the least risky of all real estate investments, since these properties (usually) do not involve tenant turn-over (and the costs associated with re-leasing) are usually long-term, and if the tenant is considered "investment grade", the risk is substantially mitigated.

 

 

 

 

 

 

 

 

 

 

 

 

Land: Inherently has the most risk, since it is speculative in nature. An investor in land can hold a property for many years with little or no income during the holding period, and may or may not realize a return, depending solely on the hope that the land is in the "path of progress". An investor may not only never realize a return, but may actually lose principle value, and incur out-of-pocket costs throughout the holding period.

Multi-Family: Properties are subject to many market, base economic and demographic influences which can "make or break" a properties' potential for producing income as well as have severe effects on intrinsic property value. Also, since the leases for these properties are usually no more than one-year in length, the turn-over and potential for loss of income is significant. There are certainly multi-family properties which are seemingly never at risk for any vacancy and the rents and values historically have continued to rise, but the overall risk remains high.

Multi-Tenant Retail: Since retail sales are so dependent on the property location and overall economic indicators, it is considered to be one of the most risky real estate investments. A new by-pass can change a traffic pattern and virtually "kill" a retail properties' vitality overnight. On-going demographic shifts can change shopping patterns and a retailers' market can dry-up over time. Inflation and product shortages can cause further problems. A multi-tenant retail owner must consider the likelihood of losing its "mom & pop" local retailers and should brace for the potential loss of an anchor or "credit tenant" over any reasonable holding period. Retail sales are finicky and seem to be influenced by tenants, fashions, climate & weather, as well as problems brought on by retailer ineptitude and apathy. Corporate mergers & acquisitions and bankruptcy can also have significant negative impact on a properties' health with little or no recourse available to the investor. Advancements in technology and continued exponential growth of the Internet and Internet based shopping continues to threaten retail sales. If this trend to erodes additional sales, one can expect more store closings, which will have severe implications on retail investments.

Multi-Tenant Office: A growth economy like the one the U.S has been in for the past nine years, causes many of us to forget the "lean and mean" years of office space of the late 1980's and early 1990's. Some sub-markets like the Houston and Dallas Texas, CBDS' were renowed the world over for the beautiful office towers that were said to be "see through" because of high vacancy rates. In some markets, Landlords were, receiving enough rent to cover the real estate taxes from the tenant. Negative net rents were the norm in some cities. Work-outs and lender repossessions were at an all-time high. Because this scenario could easily be repeated, the Multi-Tenant Office market is considered relatively risky. The costs usually attributed to re-leasing office space can be very high so most investors in this product type demand returns commensurate with the inherent risks.

Multi-Tenant Industrial: Considered by many to be of very low risk. This product type is often the "darling" of the industry because of its (relatively) low re-leasing costs combined with the lower up-front construction costs. The market demand fluctuates of course, as do tenant requirements. It was only twenty years ago that a 14' foot clear height was considered industry standard. Now, with mechanical and technological advances 32' feet may be too low. Product obsolescence can turn a very profitable property into a "white elephant" overnight. Manufacturing and distribution trends can have further implications. Ease of transportation and traffic patterns can cause many tenants to move considerable distances to cut overhead costs. The Multi-Tenant Industrial tenant is usually the most cost sensitive, since one of its biggest overhead items is usually the cost of the space it occupies. Any potential savings achieved is particularly attractive. This may mean relocating to a facility which offers higher ceilings, better and cheaper utilities and lower real estate taxes. Areas that were once considered pioneering and "out in the boonies" are now inner-ring suburban locations with increased assessed values, which unfortunately means increased real estate taxes. Investors of this property type can also be subject to re-leasing costs and potential vacancies, but overall, Multi-Tenant Investment is considered to be a relatively safe real estate investment. Product availability and lower rates of return may impact some decisions.

Single Tenant Net-Leased: Considered to be the lowest risk property type, since it usually involves a long-term lease, with one tenant. Often the lease is with a "creditworthy" national or regional tenant. Net-Lease properties are usually very well located, quality real estate with good demographics, and probable long-term residual value.

Also, these properties are one of the most passive forms of ownership, involves little or no problem tenants and vacancies or related lease-up costs. Although returns vary based on the tenant, lease structure and location, an investor can expect "going-in" cap rates of 6.50% to 10.00%.

R A T I N G   A G E N C Y   C R I T E R I A

Bond Rating

Summary

Much of the debt issued by governmental entities is rated by private, independent bond rating companies. The bond ratings assigned by these companies reflect the degree of risk associated with the bonds. There are three major companies which rate municipal debt issues in the United States:

• Moody's Investors Service; (Moody's)
• Standard and Poor's Corporation; and - (S&P)
• Fitch's Investors Service. (Fitch)

 

Bond Rating Categories

Each of the rating companies has a rating scale which reflects the degree of risk associated with a bond. High-end ratings reflect the lowest-risk issues; typically these bonds can be issued at lower interest rates.

• The Moody's scale ranges from "Aaa" on the high end to "C" on the low end with seven intermediate categories.
• Standard and Poor's index ranges from "AAA" to "D" with eight intermediate categories.

Bond Rating Criteria

The rating companies use very similar criteria in determining municipal bond ratings. Each identifies essentially the same four principal credit factors which figure into the rating of long- term bonds:

• economic factors;
• debt factors;
• governmental/administrative factors; and
• fiscal/financial performance factors.

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Bond Ratings

Bond Rating Categories

Although bonds do not legally require a rating, issuers are compelled by circumstances to have most of their large debt issues rated. Investors use the bond ratings to analyze the degree of risk associated with purchasing various public securities. High ratings reflect a low risk of non- payment on principal and interest by the issuer, whereas low ratings reflect a higher risk of non- payment.

There is a clear inverse relationship between bond ratings and the interest rates at which bonds are issued: the higher the bond rating, the lower the interest rate for the bond due to the decreasing risk of default. All long-term bonds rated below the fourth category are judged to be below investment grade (speculative grade) and are often referred to as "junk" bonds.

Bonds are classified into two types for the purpose of the rating process - short and long-term debt. To qualify as short-term debt, issues cannot have maturity schedules of greater than four years. Many bonds with maturity schedules of less than four years and all bonds with maturity schedules of more than four years are considered long-term debt. Standard Poor's and Moody's rate commercial paper on a separate scale from other short-term notes.

Tables 1 and 2 describe the ratings for investment grade and non-investment grade bonds.

Table 1. Bond Ratings for Long-Term Bonds of Investment Grade

RATING	EXPLANATION
Moody's Aaa, S&P's AAA, and Fitch AAA	These ratings are the highest grade a bond can be assigned; Triple-A bonds have a relatively small degree of risk because payment is secured by a stable revenue source
Moody's Aa, S&P's AA, and Fitch AA	These ratings are similar to that of triple A, but differ only in that the revenue sources for double-A rated bonds are slightly less secure than the revenue sources of triple-A bonds
Moody's A, S&P's A, and Fitch A	Considered upper-medium grade, but revenue sources are relatively susceptible to fluctuations in relevant economic conditions
Moody's Baa, S&P's BBB, and Fitch BBB	Medium-grade obligations that are adequately protected and secured, but nonetheless may be unreliable if relevant economic conditions have long- run adverse effects on revenue source

Source: Public Finance Department, Moody's Investor Service, An Issuer's Guide to the Rating Process, New York, NY, 1993 (information pamphlet); Standard and Poor's Corporation, Municipal Finance Criteria, New York, NY, 1994 (information pamphlet); Fitch Investor Service, Fitch Ratings, New York, NY, 1994 (information pamphlet).

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Table 2. Bond Ratings for Long-Term Bonds Below Investment Grade

RATING	EXPLANATION
Moody's Ba, S&P's BB, and Fitch BB	Lower-medium-grade obligations that are presently adequately protected and secured, but represent long-term risk whether relevant economic conditions are favorable or not
Moody's B, S&P's B, and Fitch B	These bonds are presently adequately protected and secured and represent risk regardless of economic conditions. In addition, it is likely that future relevant economic conditions will be unfavorable, thus intensifying the probability of default
Moody's Caa, S&P's CCC, and Fitch CCC	Besides future risks typical of bonds in the previous category, these are presently not adequately protected and secured, as present relevant economic conditions pose a threat to revenue source
Moody's Ca, S&P's CC, and Fitch CC	High degree of present and future risk; Greater chance of default by issuer; Debt issued in same conditions which produced CCC rating of a prior issue; Given CC rating because of additional insecurity of being issued after CCC bonds
Moody's C, S&P's C, and Fitch C	For S&P's and Fitch, debt issued at same conditions which produced a CCC-rating in a previous issue is given a C rating because of additional insecurity of being issued after CCC-bonds; For Moody's, these are "the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing"
S&P's CI	Reserved for income bonds on which no interest is being paid.
S&P's D and Fitch DDD, DD, and D	Assigned these ratings when payment is due and issuer defaults.
S&P's and Fitch	Plus (+) or minus (-): Indicate relative standing within the major categories from AA to CCC
Moody's "1"	Used to distinguish best bonds in each of five categories, Aa, A, Baa, Ba, and B

Source: Public Finance Department, Moody's Investor Service, An Issuer's Guide to the Rating Process, New York, NY, 1993 (information pamphlet); Standard and Poor's Corporation, Municipal Finance Criteria, New York, NY, 1994 (information pamphlet); Fitch Investor Service, Fitch Ratings, New York, NY, 1994 (information pamphlet).

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Short-Term Debt

Moody's rates short-term notes on the Moody's Investment Grade (MIG) scale. Short-term notes issued with variable interest rates are rated by Moody's on the Variable Moody's Investment Grade (VMIG) scale. Notes must have a demand "put" feature to qualify for VMIG designation. The criteria associated with these two scales are identical.

Standard Poor's assigns two ratings to any long- or short-term issue containing as part of its provision a variable rate demand feature. The second rating represents the demand feature. Fitch does not make a distinction as it rates all short-term issues, including commercial paper, on the same scale. Moody's and Standard Poor's rate commercial paper, short-term obligations with a 365 days or less maturity, on a different scale than short-term debt.

Tables 3 and 4 display the rating categories for short-term debt, short-term notes, and commercial paper.

 

Table 3. Moody's Ratings for Short-Term Debt

RATING	EXPLANATION
MIG 1/VMIG 1	Superior financial backing; Issuer has access to wide variety of financial protection in the event primary revenue source is weakened
MIG 2/VMIG 2	Financial backing is strong, but issuer does not have access to as wide a variety of protection mechanisms as notes in higher category
MIG 3/VMIG 3	Financial backing is still strong but protection mechanisms have the possibility of failure
MIG 4/VMIG 4	Adequate protection, but specific risk exists with this issue
SG	Inadequate protection of short-term issue

Source: Public Finance Department, Moody's Investor Service, An Issuer's Guide to the Rating Process, New York, NY, 1993 (information pamphlet).

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Table 4. S&P's and Fitch's Ratings for Notes

RATING	EXPLANATION
SP-1 and F-1	Strong financial backing; Will be given a SP-1+ or F-1+ rating if financial backing is undeniably strong
SP-2 and F-2	Issuer has satisfactory, but not outstanding, capacity to pay principal and interest
SP-3	Issuer has only speculative capacity to pay principal and interest.
F-3	Issuer has merely adequate capacity to pay principal and interest, and changes in relevant conditions could easily cause these issues to be of speculative quality
F-S	Capacity of issuer to pay principal and interest is speculative
D	Fitch assigns this rating to issues which are in actual or imminent payment default

Source: Standard and Poor's Corporation, Municipal Finance Criteria, New York, NY, 1994 (information pamphlet); Fitch Investor Service, Fitch Ratings, New York, NY, 1994 (information pamphlet).

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For more information on our net lease properties, call
Keith A. Sturm, CCIM 612-376-4488.

 

First, you either discuss, email, or fax your investment criteria to us. Please make sure you include your geographic, risk vs. return, and management desires. Upland will cull its' list of available properties, and will contact Developers or Sellers on your behalf to find properties which may meet your requirements. We can help you analyze the investment opportunities and provide you with the significant information to assist you in your evaluation. Once you have determined that a property (or properties) might fit your criteria, Upland will contact the Developers or Sellers on your behalf and will assist you and or your council in drafting a non-binding Letter of Intent. This document helps you and the Developer or Seller "get on the same page" economically, and assists the attorneys in drafting a Purchase and Sale Agreement under terms and conditions agreed to by the Buyer and Seller. Often it is advised to write Letter(s) of Intent on more than one property (especially if the Buyer is involved in a 1031 Tax Deferred Exchange). Upland has an on-line Letter of Intent available. This form can be used 24/7 to facilitate in the offering process. Upland will usually convert this document to a more acceptable form for your signature, but using it can save valuable time.

Upland, using its' close and professional relationships with the Developer's and Seller's can often ask them to keep the property "off the market" while you continue your property evaluation, and or Due Diligence.

Once you have a fully executed Letter of Intent, a Purchase and Sale Agreement is then drafted by the attorneys.

After all terms and conditions are agreed to between the Developer or Seller and the Buyer, the Earnest Money is deposited with a reputable title company and the Developer or Seller delivers the Due Diligence materials to you.

You then have a specified period (usually between 20-45 days) to review the due diligence materials and physically inspect the property or properties. Negotiations, questions and concerns are raised and discussed by legal counsel during this period.

Once all questions and concerns are taken care of, the Buyer and Seller can proceed toward a Closing.

Please call a member of our team to discuss current returns. Historically, they have ranged from 5-15%.

Usually, Net-Leased Investment Properties have lease with lease terms between ten and twenty years. There are investments with less than ten years available for purchase, but they are usually leases that have aged and are often problematic for an investor who must seek financing. Short term leases also have residual value risks. Conversely, there are leases that run longer than twenty years, but these properties are harder to locate and usually are offered only in pure Sale/Leaseback type transactions.

 

The Net-Lease Team has over 500 net lease properties valuing approximately $1.5 billion.

Yes. Upland prides itself on creating and maintaining its relationships with many Developers and Sellers. All of the properties are offered directly through the Developers or Sellers and are not part of a "daisy chain" of brokers. We do not believe in the mantra of the "Xerox Cowboy", who offer properties offered by other brokers, who have no relationship with the Developer or Seller and often are showing properties that have long ago either been sold or withdrawn from the market. You as a Buyer, can incur significant damage should you rely on bad information and were to include unavailable properties on your official list of replacement properties on a potential 1031 Tax Deferred Exchange. We do not exclusively list all of the properties we are marketing, but do have significant knowledge of the property status and information through solid relationships and timely communication with the Developer/Sellers.

Yes. Upland has been specializing in Net-Leased Property Sales since 1993. We have resources and sources of properties available to us that no one else can claim. We have broker-associates that have "pocket-listings" that are not available to other brokers, but because of our prior relationship and cooperation are willing to share these properties with us. An investor should always consult with the Net-Lease "Go-To Guys" if they are considering this type of property. At Upland we do more than talk about deals…… "we do deals." See what our clients say."

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