The Golden Egg of CRE – Absolute Net Lease

Investors prize after real estate deals that guarantee safety and high rates of return. These days it’s hard to know where to look. My advice to you: consider the absolute net lease, also known as the land lease.

Picture a prime piece of property on a high traffic corner, free of development — to put it simply, it’s an empty plot of land in a top spot in town. For a moment, pretend you’re the owner looking for a safe and lucrative investment.

What do you do? One solution is to build on the property and rent out the space to prospective tenants, but it’s a risk since you’d have to drop more money on the property. The other option is to pursue what I call the crème de la crème of real estate, an absolute net lease or — leasing the land.

Golden Egg absolute net lease

Find an accredited tenant that is willing to lease the space and build. This is a typical move in the retail industry and leads to decades-long contracts with reputable companies able to pay their rent. And if they default, your land will be worth more with the addition of a property paid for by the original leasing party.

Often, these accredited institutions, like McDonalds or Walmart as an example, will provide property owners with a letter of intent to lease the property. Most of the time, these institutions will sign a decades-long lease, spanning 20 or even 40 years.

mcdonalds absolute net lease

All costs associated with building on the property, including utilities, taxes, insurance and more are the burden of the leasing party. In essence, they assume the responsibilities of the property owner, but don’t legally own the land.

So if you’re a broker or have a client with land looking for a safe investment, get on the phone and start dialing retailers that are expanding in your market.

These properties are in high demand. Investors are willing to pay some of the highest premiums and lowest cap rates for these types of leases. In fact, I get calls on a similar property of my own about once every other week. It’s in hot demand and I don’t want to sell — It’s really the best problem to have in real estate.

Troy Muljat

Troy Muljat is a Washington State certified commercial appraiser and broker with over 25 years of experience in the commercial real estate industry.

He specializes in brokerage, leasing, property management, development, and commercial appraisal.