November 13, 2017

JF1168: Have Your Tenants Pay Taxes, Insurance, and Maintenance! With Dave Sobelman

Triple net leases allow investors to be very close to passive. The three nets; taxes, maintenance, and insurance, are all paid by the tenants. You can imagine the headaches that could save the building owner! While this strategy does offer less risk, it also comes with a little less return on your money. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Dave Sobelman Background:

  • Founder & CEO of Generation Income Properties (a public net lease REIT)
  • Founder of net lease brokerage firm 3 Properties.
  • Managed more than 1,000 single-tenant net lease transactions and has been involved in about $10 billion in transactions
  • Began his tenure in commercial real estate as a Research Analyst and Associate for Grubb & Ellis Company
  • Was responsible for maintaining market data for over 134 million square feet of area properties and accurately forecasting regional trends for client assessments
  • Based in Tampa, Florida
  • Say hi to him at  
  • Best Ever Book: Shoe Dog

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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff.

With us today, Dave Sobelman. How are you doing, Dave?

Dave Sobelman: I’m doing great.

Joe Fairless: Nice to have you on the show, I’m glad you’re doing great. A little bit about Dave – he is the founder and CEO of Generation Income Properties, which is a public net lease REIT. He is the founder of net lease brokerage firm 3 Properties. He’s managed more than 1,000 single-tenant net lease transactions and has been involved in about ten billion dollars in transactions. Based on Tampa, Florida. With that being said, Dave, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Dave Sobelman: Thank you so much. When you go through my [unintelligible [00:01:54].00] I can’t believe where we’ve come. I started my career at the very bottom. I was a research analyst for a national commercial real estate brokerage firm, where I sat in a cube; no one talked to me, the cube was far away from everyone, and they just wanted me to crunch numbers. It was one day when someone came up to me – about eight months after I started – and asked me my first question in that analyst role, and that’s when I knew that people started to value my work and my opinion.
Since then, I’ve had a sole focus, strictly on triple net lease investments throughout the entire country. Like you said, I’ve done about ten billion dollars in transactions in the last 15 years, and it’s been really interesting to see how having that sole focus has been extremely accretive to not only the companies that I’ve started, but also the industry itself.

I was an anomaly back 15 years ago when I was solely focused on this one property type, because net lease properties truly just were an ancillary investment at that point. A lot of shopping center owners had these outparcel locations, like a McDonald’s or a Burger King or something like that; they didn’t really treat them as an investment – or I should say an industry – in and on itself. So when someone like me came along and said “I’m only gonna focus on these single-tenant triple net lease assets”, we kind of took the market by storm at that point.

Joe Fairless: For anyone not familiar with what you mean when you say single-tenant triple net lease, will you just quickly define that?

Dave Sobelman: The stereotypical example of a single-tenant commercial triple net lease property is your average neighborhood Walgreens drug store. Most people know what that means. There is one parcel of land, there is one building, the building was built specifically for Walgreens in this instance, there’s one lease — a lot of people don’t know that Walgreens in this case doesn’t own a lot of their real estate, they lease it from people who build these buildings for them, and the leases are very long. In their case, they’re 75 years. They have options to terminate after 25 years, but even 25 year is a long time.

Walgreens is a big public company, and they have what’s called an investment-grade credit rating, meaning that they don’t have a lot of debt and they’re a strong and sound, credit-worthy company. Putting these factors together – real estate, good credit tenants, long-term leases, and you get the makings of a good investment.

Now, why are they called triple net leases is – and this may be strange for people to hear, but the three nets are taxes, maintenance and insurance. Those three attributes of the operations of the property are the tenants’ responsibility, not the landlord.

So the landlord in essence is passive from a day-to-day operational perspective. So these triple-net leases are actually very common around the country, and a lot of people don’t know that, but you can be a (somewhat) passive landlord – I put parentheses around ‘somewhat’ because no real estate is passive altogether, but this takes away changing light bulbs and fixing toilets and so on.

Joe Fairless: Ideally, we’re all doing that, not changing light bulbs… Ideally, we all have triple net lease tenants. The perception that I have – and I know you’re gonna educate me otherwise – is that there’s not as much money in buying these types of properties, because they’re… And again, you’re gonna probably punch me in the face when I say this – it’s easier to do triple net lease, to buy them, and you’re not gonna make as much money. So what did I just say that was incorrect?

Dave Sobelman: There’s definitely a stigma on the properties that when you have lower risk, lower amount of responsibilities, that your yield is lower. In some cases it’s very much true, so I wouldn’t disagree with that at all. When you’re getting into higher risk properties, let’s say buying vacant buildings or vacant land that you have to develop, your returns will be higher, but you are taking more risk. So these are probably one of the best risk-adjusted returns that an investor can get, real estate or otherwise.

Let me quantify that for you somewhat. Let’s just continue using our Walgreens example. If you were to purchase a Walgreens drug store as a triple net lease real estate investment, your return today would probably be around six; maybe a little bit lower, maybe up to seven, and that’s a percent return. If you’re getting that 6% return, you have Walgreens as your tenant for 25 years, you get the appreciation of the building, if you have a loan you get to deduct the interest expense on that loan… Now, let’s say you want to buy a bond. A lot of people know that bonds are very conservative; bonds are based on the guarantor of that bond… So let’s say we buy a Walgreens corporate bond. Today, that bond is still guaranteed by the exact same company that’s occupying the Walgreens drug store. The term could be the exact same, 25 years, and obviously the credit of the company is the exact same as the tenant who is occupying that building. But if you were to buy that bond, you are probably getting a 3% or 3,5% return.

So you have multiple hundreds of basis points difference in buying a net lease property versus their corporate bond. Now, if you’re comparing it to higher risk real estate investments, yes, they are on the lower end of things. But from a risk-adjusted basis, they are actually tremendous investments.

Joe Fairless: With your REIT, is your — I hate to say elevator pitch, because I don’t pitch things and I know you don’t either, but your short and sweet value proposition basically that? It’s “Hey, you’re likely gonna get a better return than buying a bond, and you have a collateralized asset?”

Dave Sobelman: No, that’s not my value proposition at all, because having a public REIT – there’s a tremendous amount of disclosure and transparency. That’s one of the things I like about the REIT – just telling the public everything. One thing I like to say is that my REIT Generation Income Properties is not a new concept. I’m not the first triple net lease REIT. In fact, there are 14 other triple net lease REITs that are currently trading all on the New York Stock Exchange.

Now, each one of those REITs has their own strategy within this niche product type. Some people say “We’re strictly gonna buy retail properties” or “We’re strictly gonna buy net lease office properties, or industrial properties.” Some other REITs will say “We don’t wanna buy any credit-worthy tenants whatsoever, so we will never have a Walgreens using that example in our portfolio. We only wanna buy much higher risk credit tenants, because our returns are higher”, and then different variations on everything I just said.

Joe Fairless: Okay.

Dave Sobelman: So the difference between Generation Income Properties and the other 14 net lease REITs is that GIP focuses on the real estate. Now, let me tell you what that means. When someone goes to buy a net lease property, typically they’re looking at the credit of the tenant and how long the lease is, because they want to make sure that their investment can actually pay them income, pay the rent for as long a period as possible, and that’s great. But you are buying that Walgreens that we’re using as an example in midtown Manhattan or in Dubuque, Iowa. With all due respect to Dubuque, Iowa, there’s probably a drastic difference in the valuation of the real estate than midtown Manhattan.

So Generation Income Properties puts the real estate underwriting first, because what we wanna do is increase the value of that real estate during our ownership, and ultimately what that means is not only do we get paid this rent from these investment-grade credit tenants with long-term leases, but there’s a much higher probability of that property appreciation during our ownership, and being a public company, if you do have appreciation of your assets, then the assets or net asset value of the entire company increases, and ultimately what happens is the stock price increases along with it. So I’m treating Generation Income Properties as a growth company, much more so than just a dividend machine, which all the other net lease REITs provide. They wanna tell their shareholders “If you invest with us, we will pay you a 4% return and we’ll pay you every quarter or every month, however it is.” A lot of people like that consistency, but I also provide that same market dividend, but I’m also giving the shareholders a much higher probability of increasing the stock price by buying only in the top 20 highest density cities in the country, like New York, L.A., Atlanta, Washington DC and so on. And they’re all listed on my website, the top 20 cities.

Joe Fairless: How do you increase the value of a triple net lease property?

Dave Sobelman: Just as I stated – by buying good real estate. Because most people derive the value of a net lease property from the credit of the tenant, and the length of the lease. What ultimately happens is the price is derived based on a return, which is called a capitalization rate (cap rate). When I mentioned the 6% return from the Walgreens earlier in the conversation, that’s what people like to see. “I’m gonna get a 6% return on my money, and I’m comfortable with that.” And that’s just based solely on the income, and they’re not really looking at increasing the value of the real estate, and that’s done strictly through higher density, better demographics, tough to invest markets, and just what we call barriers to entry, and that’s what we focus on… Because history has proven that you can quantifiably increase the value of a property by buying in these poor markets.

Joe Fairless: Okay, so you’re not doing anything to the property; you’re identifying the right place to buy the property, and then based on historic data, the property will appreciate because of the area that it’s in.

Dave Sobelman: Very much so. Our very first asset was purchased in Washington DC, just North of the White House. The tenant is 7-Eleven. Not super sexy, not exciting; most people will go get their Slurpee or their hot dog or their drink from there, but they have a AA- Standard & Poor’s credit rating. It’s one of the highest credit ratings there is. The Federal Government, by comparison, is AA+, so they’re not too far off from a credit perspective. This property was a brand new construction, it was the ground floor commercial condominium of a brand new construction, residential condominium building. It’s in the middle of everything, it took them four years to build this property, just because it’s so difficult to build in Washington DC. 7-Eleven has a ten-year lease (triple net), and not many people would have the opportunity to buy this. In fact, this didn’t even go on the market because the seller contacted me directly.

Another value proposition for the REIT is just my reputation in the industry allows me opportunity or access to different properties that most people wouldn’t. So that property is a great example of buying in the middle of everything, and it’s hard to buy in Washington DC. We have properties under contract in Tampa, Florida, about to be Atlanta, Georgia… Just very core markets that typically appreciate in value much faster than secondary and tertiary markets of the country.

Joe Fairless: Other than the 20 highest density cities, what are some specific benchmarks that you look for in demographics for where you buy?

Dave Sobelman: The easy ones to look for are just income, number of people, I look at the trends as well – are the trends going up or down? And then I actually visit each property I go to, to get a feel of it. Let’s take this Atlanta property that I just mentioned – it’s occupied by SunTrust Bank, which if some of your listeners don’t know, it’s a public company, Standard & Poor’s credit rating of A, and they’re headquartered in Atlanta. So this is a prime site for them.

I actually went to the site, I lived just above another commercial condo, triple net leased to SunTrust; I rented an apartment that’s just above this building and I actually embedded myself in the community for a period of time, so I can see…

Joe Fairless: How long?

Dave Sobelman: One night, two full days.

Joe Fairless: [laughs] You made it sound like six months or a year.

Dave Sobelman: No, for sure… I still want my wife to like me.

Joe Fairless: Alright, so you spent the night there, okay.

Dave Sobelman: But seeing the property at different points of the day is really important, because a lot of people go to a property one time, they drive by it, they don’t go inside, they just see “Yes, it does exist”, and they’re comfortable from that point on.

I take a much different approach, where I like to see it during morning hours, during lunchtime traffic where people are out getting their lunches; in the evenings, after they’ve left work, what’s the nightlife looking like? And so on.

There’s lots of different ways to diligent a property from a physical perspective, and that’s something that I take very seriously.

Joe Fairless: Drill in a little bit deeper on specifics  – you said you look at the income, the number of people, trends going up and down… Can you give us some specifics as far as what income do you look at, what number, how many people – 20, 5 million, 300 thousand? And what specific trends?

Dave Sobelman: I don’t have specific numbers, because every market is different. Washington DC actually has higher density than Atlanta, Georgia, and I’m not talking about the suburbs of Atlanta either, I’m talking about Atlanta proper, downtown Atlanta. So the densities are just different. So I don’t have threshold numbers, we take up to 100 different variables into account in any one property.

Joe Fairless: Are all 100 weighted equally?

Dave Sobelman: No.

Joe Fairless: What’s weighted the most?

Dave Sobelman: Just appreciative value. So “What is the potential to appreciate the value of this site?”, that’s the most important variable. But if we’re getting into the minutiae of underwriting, then we can look at “Is the property on a corner, or is it mid-block? What’s the access to the property? Is it good or is it bad? Does the property have parking?” If it doesn’t have parking – like a lot of these dense properties, they don’t have parking at all – then how do people access this property and how do they get to this property? What can we reuse this property for? Even though I’m telling you a great story right now that we’re buying properties occupied by these tremendous companies, I’m always looking at the asset from the worst-case scenario, because what we’ve learned during the last recession is even great companies go out of business.

Kmart used to be a great company, Circuit City used to be a great company, Blockbuster was a great company… And what we learned is even though they were a great credit-worthy company, we had to start learning how to reuse their real estate. In a lot of cases, that’s happening. Blockbuster is probably the best-case scenario on that. Even though they went bankrupt and vacated all of their thousands of locations around the country, a lot of them were in great locations. Those landlords who owned those assets were able to either sell them, or completely reposition them with different tenants, maybe retrofitting them for a different use or allowing the tenant to retrofit them at their own expense for a different use.

So there’s just so many different ways to look at an asset, and you really don’t do that unless you’re spending a decent amount of time there.

Joe Fairless: Based on your experience, for a Best Ever listener who’s listening to this and thinking “Well, I like what you’re saying and I wanna get in on some triple net lease single-tenant properties”, what’s your best advice ever for them as a startup?

Dave Sobelman: Well, first of all, they’re expensive. So if you’re gonna buy a property for yourself or a small partnership, I wouldn’t recommend just throwing a few dollars together. I would recommend waiting and kind of saving those dollars until there’s a substantial amount. That substantial amount could be 2-3 million dollars.

If you wanna get into the net lease business and have some exposure in your account to net lease properties, that’s what REITs are set up for, where you can buy shares of the REIT that’s focused on the net lease properties themselves, and then you can have your exposure that way.

Typically, if someone approached me during a brokerage transaction where they wanted me to represent them to purchase an asset and they said — let’s say I have $500.000, which you and I both know the value of a dollar, we both know that that’s a tremendous amount of money, but in the scheme of a net lease investment it’s a very low dollar amount. So the quality of the asset that they would be purchasing at those low dollar amounts would not be worth the risk that they would be taking.

So I would either encourage them to put a lot of people together at $500,000 each, or to kind of spread their risk and get the diversification of a REIT that’s focused on this.

Joe Fairless: Are  you ready for the Best Ever Lightning Round?

Dave Sobelman: Let’s go!

Joe Fairless: Alright. First, a quick word from our Best Ever partners.

Break: [00:20:54].11] to [00:21:51].26]

Joe Fairless: Best ever book you’ve read?

Dave Sobelman: Shoe Dog, by Phil Knight. It’s essentially my life story.

Joe Fairless: Best ever deal you’ve done?

Dave Sobelman: Probably a 17-property portfolio occupied by Havertys Furniture, in 10 different states, at a value of about 55 million dollars.

Joe Fairless: And why is that the best ever deal?

Dave Sobelman: Well, number one, the scale of it. Number two, it was very early in my career, so it was very meaningful to me.

Joe Fairless: How do you make money on these deals?

Dave Sobelman: My best advice to people who truly wanna make money on net lease properties is to make sure that you hold them for generations, hence the name of my REIT, Generation Income Properties. You wanna have that sort of outlook. You will get paid during your ownership of this property – that’s what the tenant is there for, that’s what the rent is there for… But you wanna make sure that you’re holding it for a long period of time so you can make a lot of money.

Joe Fairless: What’s a mistake you made on a transaction?

Dave Sobelman: Probably early in my career – this is an asset that I still own, because it’s not sellable; I just jumped at an opportunity, what I thought to be a well-priced net lease property, and it turns out that the tenant was very poor, and they vacated the property. We got a second tenant in there, they were very poor, they vacated the property – all of that happened within a  few years of each other, and now the property’s location is what I would call tertiary market… There are so few tenants who truly wanna be in this asset. It’s really a lesson that I learned – to your point, my worst deal ever – that in real estate the actual location does matter.

Joe Fairless: Best ever way you like to give back?

Dave Sobelman: My wife and I have a family foundation called The Wellspring Fund that focuses on children, and exposing them to other children that may be a little bit different than themselves – whether it has to do with nationality, race, religion, ethnicity… We really focus our philanthropy through our family foundation.

Joe Fairless: How can the Best Ever listeners either get in touch with you or learn more about your company or REIT?

Dave Sobelman:, that’s the website for the REIT. All of our contact information is there, there’s a video about me, you can hear me talking about the REIT, and I actually personally respond to every e-mail and every phone call. Actually, one of my great pleasures is educating people about the REIT, introducing them to that… So all of the investors who are in the REIT now, they’ve all had personal interactions with me, which I very much appreciate.

Joe Fairless: Dave, thank you for being on the show and talking about your positioning within the REIT space, how everyone is looking for that angle – some only retail-focused, industrial office, some no credit-worthy tenants because they want a little bit higher risk for better returns… Your focus is on the real estate itself and the appreciation of that real estate based on the location of where it is and how it’s positioned in that particular submarket, and then all the lessons learned along the way.

Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Dave Sobelman: Thank you.

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