Q. What is a net lease?
A. A net lease (sometimes referred to as a triple net, bond or bondable lease) is similar to a bond issued by the Lessee and held by CRIC2 Funds or another Lessor. A net lease transaction can create significant short and long term financial and tax advantages for the business.
Also, under the net lease, the Lessor owns the property, while the Lessee keeps full control over the operation and use of the real estate, pays rent, and assumes the obligations, risks, and costs of maintaining the property.
Q. Why should I consider net leasing for my business?
A. A company that uses its own capital to invest in real estate is diverting funds from its primary business. Unless there are no opportunities within its core business, it is hard to justify this use of its capital. A net lease transaction can free up needed capital and create significant short and long term financial and tax advantages for your business. Contact CRIC to learn more.
Q. Why is a CRIC2 Funds net lease transaction better for my business than direct mortgage financing?
A. A CRIC2 Funds net lease transaction has several advantages over direct mortgage financing. First, in a CRIC2 Funds net lease transaction, the Lessee receives 100% funding of the real estate. None of the business’ cash has to be invested in acquiring the property. Under a traditional mortgage arrangement, the business can typically finance only up to 80% of the cost or value of the real estate and must fund the balance in cash. Second, the Lessee can deduct all rent payments, including the rent allocable to the land. With mortgage financing, only the interest portion (not the principal) of the debt service is deductible plus depreciation of the improvements (but not the land). Moreover, since thirty-nine year depreciation is generally required for real estate, the value of the depreciation deductions is relatively low. Third, as a result of the 100% rent deduction, the after-tax cost is usually much less than the after-tax cost of conventional mortgage financing. Contact CRIC2 Funds to learn more.
Eligibility for a Net Lease Transaction
Q. What types of properties are eligible for CRIC2 Funds?
A. The properties eligible for CRIC2 Funds’ net lease program will be for single tenant use, including office, retail, warehouse, R & D, industrial facilities, distribution facilities, and manufacturing facilities. Under appropriate circumstances, particularly when the real estate assets are mission critical to the company’s business, the properties can include special use facilities, such as redundancy centers or logistics facilities. Raw land, residential or agricultural properties are generally not eligible.
Q. What credits will CRIC2 Funds consider?
A. CRIC2 Funds will consider investment-grade companies (or the equivalent) and select below-investment-grade companies. Unrated companies, or sellers of properties that are net leased to unrated lessees, must provide a minimum of 3 years’ financial statements in order for CRIC2 Funds to determine the company’s/lessee’s creditworthiness.
Q. Will CRIC2 Funds fund construction in Build-to-Suit instances?
A. Yes. CRIC2 Funds will fund construction of Build-to-Suits based on similar criteria to other net leases. A distinct advantage of CRIC2 Funds construction funding is that it eliminates the Lessee’s need to obtain a separate construction loan. Contact CRIC2 Funds to learn more.
The Financial and Operational Benefits
Q. How will net leasing save my company money?
A. A net lease can result in a number of significant short and long term financial and tax benefits for your business.
1. The After-Tax Benefits
The after-tax benefits of net leasing can provide a company with greater savings than other forms of asset-based financing. If a company leases a property, it can deduct 100% of the lease payments against its taxable income. Therefore, leasing almost always results in a lower after-tax cost for the company than any alternative form of financing.
The after-tax cost is (a) the rent minus (b) the value of the rent deduction. The rent is fully deductible, including that part of the rent allocable to the land.
2. Better use of Capital
Even when a company claims to have access to cheaper funds, it is usually referring to bank financing. However, bank financing is short-term borrowing, usually at a floating rate. Bank financing may make sense in order to cover working capital and other short-term operational needs, but it is the wrong source of capital for the financing of long-term assets such as real estate. Sound financial management dictates that long-term assets be financed with long-term capital. Contact CRIC to learn more.
Q. If I choose net leasing, can I make alterations and additions to the property?
A. Yes. You, as Lessee, are free to make alterations and additions that can help you to successfully run your business, as long as the alterations and additions do not reduce the fair market value of the property.
Q. Can the Lessor interfere with my use of the property or impose other restrictions over my general business operations contained in the lease?
A. With CRIC2 Funds net leases, typically, there no other restrictions over the general business operations of the Lessee contained in the lease. The net lease does not prohibit you from doing anything that would not be prohibited under a conventional leasing or mortgage arrangement. Contact CRIC to learn more.
Q. How flexible can you be in structuring a transaction that can meet my company’s needs?
A. CRIC2 Funds has the capital and experience to provide great flexibility in structuring transactions to meet your company’s needs. CRIC2 Funds brings together pioneering net leasing professionals with serious financial resources.
Q. How does CRIC2 Funds determine the rent under a net lease?
A. The net rent during the basic term of the lease will be based upon three primary factors:
• The financial condition of the Lessee
• The value of the real estate
• The term and structure of the transaction
This rent, together with the estimated residual value of the property, will be in an amount to repay CRIC2 Funds’ investment in the property, plus a base return, over the basic term of the Lease.
Q. How long is the basic term of a net lease transaction?
A. The basic net lease term is usually anywhere between 10 and 25 years. The basic lease term cannot exceed 75% of the economic useful life of the property without precluding operating lease treatment of the lease.
Q. Are the rents fixed for the full term of the lease?
A. The rents can be fixed for the entire basic term of the lease or structured with periodic resets of the basic rent (for example, after five or ten years), at the Lessee’s option.
Q. Can the fixed rents be stepped?
A. Yes, the fixed rents can be stepped, with lower lease payments in the early years and gradually increasing over the lease term.
Q. Are there any other rent structures available under CRIC2 Funds' net lease program?
A. CRIC2 Funds can also offer a floating rate structure under which the rent can float with LIBOR or other appropriate indices for an initial period (e.g. the first 5 years) of the lease term. At any time during the 5-year period (but not later than the 5th year), the Lessee can elect to fix the rent for the balance of the lease term.
Q. What are the Lessee’s renewal term options under CRIC2 Funds' net lease program?
A. The Lessee usually has the right to extend the lease for several renewal terms at rents equal to the then fair rental value of the property.
Q. What happens if, during the lease term, the property becomes uneconomic for continued use in my business?
A. A CRIC2 Funds’ net lease gives you the right to sublease the property and retain any excess rent. In some cases, particularly in multi-property transactions, you may also have the right to substitute another property of equal value for the property that is no longer economically useful to you.
Q. Are there circumstances under which I, the Lessee, can terminate the lease?
A. Yes, usually the Lessee may elect to terminate the lease in the event of a major casualty or condemnation. Although in some cases this right may be implemented through a rejectable offer mechanism. in many cases the Lessee may elect to terminate the lease without any further obligation.
Q. Will I be giving up the residual value of the property?
A. CRIC2 Funds’ net lease transactions can create significant short and long term financial and tax advantages for your business that far outweigh the benefits of the residual value of a business property. Equally as important, the future value of the residual in a property is speculative—being ten to twenty-five years in the future. The present value of a residual interest can be quite nominal. For example, the present value of $1,000, twenty years in the future, will be less than $150 (assuming a 10% discount rate). Contact CRIC to learn more.