As new construction remains modest, a key question in the net lease market is where future deal flow will come from.

One possible source could be debt maturities. During the run-up to the 2008 crisis, CMBS was routinely used as a financing vehicle in the net lease world with buyers obtaining as high as 80% LTV loans via the CMBS market. For a number of reasons, CMBS accounts for a much smaller fraction of lending today, and even when it does, LTV's are typically no higher than 65%. Underwriting standards in general are also much tighter today.

Depending on when loans got securitized and the LTV's of those loans, refinancing could become difficult for some. In order to have built any equity in your position at all the value of the property will have needed to increase by an amount greater than the amount the loan amortized. Lots of loans done during the time in question had interest only components that deferred any principal amortization for years. Further, for higher credit deals (i.e. pharmacies) many don't have rent increases meaning that increases in value are exclusively a function of cap rate compression. Taking into consideration the fact those deals are now 10 years older, their value is likely to the flat to only marginally higher.

The net-effect of all this is having to potentially refi a property with a 75%+ LTV loan on it in an environment where the best you might be able to do is 65% or 70%. This means either being willing to inject fresh equity into a deal or seeking strategic alternatives like selling.

Looking at the universe of properties that may be put into a difficult position, we see lots of maturities coming in 2016 and 2017 (see chart below provided by Barclays).

[IMGCAP(1)]

If you originated CMBS debt on a net lease property ten years ago, it is probably a good idea to begin looking at cap rates and refi options now to make sure you don't find yourself in a jam due to stricter lending conditions.

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Jonathan Hipp

Jonathan Hipp began his career in real estate over 25 years ago. In his early years as a broker, he ventured into the net lease industry and quickly began leading the US net lease market, closing over $3 billion in transactions. In 2005, Jon founded Calkain Companies, a company focused solely on net lease investment services. As President and CEO, he has been instrumental in building the firm into one of the leading Net Lease real estate companies, transacting over $12 billion of net lease deal volume over the past 13 years. He has expanded Calkain’s services to include brokerage, advisory, asset management, capital markets, and industry research. He has become a well-known resource, panelist, and speaker at various Net Lease and Industry conferences and is a regular contributor to GlobeSt.com on real estate trends. In June 2015, Jon’s passion for the real estate business was again recognized as he was nominated for the Top Real Estate Player in the DC area by SmartCEO magazine.

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