The School Of Cash Flow

Want to diversify your portfolio with a completely passive income stream? Join Dale Corpus as he sits down with Dan Lewkowicz to discuss triple net lease investments NNN. Dan is the Senior Director of The Lewkowicz Group at Encore Real Estate Investment Services and the host of Dan on Top. Today, he breaks down the risk and benefits of triple net leases. How recession and pandemic proof is it? Plus, Dan shares practical tips on how you can get started. Tune in for more real estate advice and know what properties you should invest in!

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All You Need To Know About Triple Net Lease Investments With Dan Lewkowicz

We have a great guest on this episode. His name is Dan Lewkowicz. He was introduced to me by my friend Todd Sulzinger, who is a past guest on my show as well. Many people in my circles have been talking about triple net lease investing. I wanted to bring more experts in that area. You are in for a great episode. Here’s a little bit more about my guest.

Dan Lewkowicz is a seasoned real estate veteran with many years of experience in many facets of the real estate industry. He started his career house hacking and he quickly moved on to flip houses around Metro Detroit. Eventually, he created a company called Renaissance Real Estate Ventures, which specializes in the acquisition, financing, renovation and resale of single-family properties in the booming city of Detroit, Michigan.

Before forming The Lewkowicz Group of Encore Real Estate Investment Services, Dan was a Senior Advisor at Fortis Net Lease, specializing in commercial real estate investment sales. He was also a former Business Development Executive for Amazon in Detroit, Michigan. Dan is the Senior Director of The Lewkowicz Group of Encore Real Estate Investment Services. He specializes in shopping centers, medical office buildings, industrial fulfillment centers, quick-service restaurants, and automotive repair and parts stores.

Of lesser-known fact, Dan possesses industry-leading knowledge on cannabis cultivation and its impact on the economy in general and industrial-commercial real estate specifically. An expert on multifamily and the current economic undercurrents facing this asset class in today’s post-COVID world, Dan often expresses the incredible opportunities for investors of all sizes. He has got four kids and resides in Birmingham, Michigan, with his wife. He enjoys running, boxing, lifting weights, yoga and playing acoustic guitar. Welcome to the show, Dan. How are you?

I appreciate that.

I love your bio and the fact that you can play the guitar. You have been able to balance out your life with exercising. You have four kids. You beat me. I have only two. I wanted to jump right into this. Is there anything in your bio that we could elaborate on a little bit more and add some color to it? I also wanted to see what your focus is. Let’s start there.

My focus is mostly and exclusively on net lease investment sales brokerage. I’m a broker. I help investors to buy or sell cashflowing assets, typically triple-net assets. You can think about your major tenants like your Walgreens, Rite Aid and CVS. We sell a lot of things like quick-service restaurants, fast food stores, some resorts, medical office buildings, industrial products and assets like that.

I want to delve more into the triple net lease space. How did you even get into real estate? I know that you didn’t do this first. It sounds like you do some corporate work. How did that transition all happen?

My start was back in 2005 when I helped start a company with some friends called Disability Made Easy, which was a barrier-free home modification company. I managed the sales and marketing for that company. I remember that we had hired a project manager to do all of our construction. I will never forget going to a site with him to look at a specific property. We got there and I was a young guy driving with a project manager. I looked over and said, “What are we going to do with this property? It looks all outdated and functionally obsolete.”

He said, “Hold on one second, Dan.” He took out his graph paper and pencil. In 45 seconds or so, he sketched a brand-new front elevation for the property. From that moment on, I recognized that there was an opportunity to take something that might have worked at a certain point in time. Maybe it has good bones, but it has an opportunity to be repurposed into something that’s better suited for its occupant or resident.

Fast forward a few years later, when it came time for me to buy my first home, I was looking at some property that was all ready to go and move-in ready. I was interested in possibly purchasing it. I noticed that a few streets over there was a bank-owned asset that had good bones and structure, but it was completely outdated and had some elements that most homeowners would not have enjoyed. I bought that property and renovated it. I ended up spending a lot of time on the job site, learning about renovations. That’s what got me into house flipping, to begin with.

I always did that as a side gig. Through the years, I had some other experiences. I was the development director at a large Jewish day school. I worked for Amazon. When I finally left the corporate world, I jumped full-time into commercial real estate investment sales brokerage. That’s where things changed because I was able to take and leverage my time to be able to work directly with investors and broker sales of properties.

It looks like with Renaissance Real Estate Ventures, you were doing rehabs of single-family homes. Do you still do that or are you doing residential investing more so? Have you moved everything more so to the commercial side?

It’s more so over to the commercial side.

In terms of the triple net lease space, I’m going to talk about that. Can you elaborate on what is a triple net lease?

A triple net lease stands for three different categories of expenses that are paid for by the tenant. I like to explain a triple net lease by contrast and it’s something like multifamily. In a multifamily property, you are going to have all of your rental income and maybe some ancillary income. You are going to have a whole barrage of expenses. You will have management, capital expenditures, vacancies, repairs, insurance and taxes. If your income is $100,000, you might have $50,000 of expenses making your net operating income $50,000.

Whereas if you have a triple net building, it’s very different because, in a triple net property, the tenant pays for the taxes, insurance, any common area maintenance if there is any, and repairs to the roof, structure and parking. There are no landlord responsibilities whatsoever. That’s why it’s called a triple net. You have got those three different categories of NNN. Those are all paid for by the tenant. When the landlord has a lease stating that he will make $100,000 of rent collection, that’s going to be the bottom line. That’s going to be the take-home and net operating income as well.

I have also heard the term absolute net lease. Does that fall in the same category or is there a difference?

It depends on where you are in the country. I like to use the term absolute triple net because that gets rid of any ambiguity. That’s the type of lease where everything is paid for by the tenant, all the expenses. There’s a double net lease where the roof and structure and sometimes the parking lot as well, that’s paid for by the tenant. In some cases, they call a triple net deal what I would call a double net deal. That’s why I like to say absolute triple net because that’s the least amount of ambiguity that includes the tenant paying for all of the expenses.

Triple Net Lease Investments: A triple net lease stands for three different categories of expenses that are actually paid for by the tenant: taxes, insurance, common area maintenance. There are no landlord responsibilities whatsoever.

What kinds of tenants are doing triple net leases? I know that Walmart doesn’t. Are there smaller companies than Walmart that do them? I’m trying to understand that as well.

Typically, they are large corporations. You also have franchisees that can have a few locations with triple net leases. If you think about fast-food restaurants, some of them will have a corporate guarantee from the entire corporation or franchisee. A franchisee could be as small as 1, 2 or 3 units.

How passive is a triple net lease investment compared to other real estate investments such as multifamily? It seems like multifamily is where most people end up starting. There are a lot of folks in that space.

To answer your question, it’s completely passive. In multifamily, you have all different types of expenses and you also have management. With an absolute triple net lease, you have a tenant that’s paying for everything. Some people call them coupon clippers. These are deals that you get a check in the mail every month.

What are the different types of asset classes in the triple net lease space?

You have got industrial fulfillment centers, FedEx Ground and properties like that. You have got office buildings and medical offices. You have got pharmacies. That’s a big one. You have got quick-service restaurants and other types of resale. Sometimes you have multi-tenant retail. It’s another asset class. In many cases, those are double net lease structures or modified grossly structures. That’s going to be a location that has many tenants in one building.

For folks that are newer to the space, what are the inherent risks when somebody is considering a triple net lease investment?

The risk in a single-tenant net lease asset would be that the tenant vacates. If a tenant does vacate and there’s a corporate guarantee, the parent company is still obligated in the lease. Unless the company goes through bankruptcy, you are still going to be able to collect rent. When you have a dark or vacant property, it’s not going to be as attractive. However, that’s one of the benefits of having a triple net lease. The guarantee is going to be from typically a corporation in that case. If they have other locations, those locations will guarantee the rental income that the tenant is signing for guaranteeing on the lease.

For the clarification aspect of things, I know that when somebody buys a single-tenant like a fast-food type of investment, say it was Burger King, they don’t own the business. They own the property. For folks that are buying their first triple net type of investment, is there any type of asset class in that space that they tend to gravitate to purchase first versus others?

It all depends mostly on their price point. Some people are constrained to a smaller price point. They might be starting with maybe a dollar store or fast-food restaurant. There are some multi-tenant properties that are $800,000, $900,000 or $1 million. It all depends on what the person is looking for and how much capital they have access to.

I’m curious because I don’t know the answer. Of the different types of asset classes in this space then, which categories are typically the easier ones to enter because of friendlier price points?

That would be more like a smaller shopping center or a dollar store typically or maybe a lower-priced fast-food deal.

I know you are a commercial real estate broker. Do you only help clients buy these types of investments in the state in which you live? Is it nationwide?

Yes.

Of the different asset types, do you primarily focus on a particular one over the others? How does that work for you?

I have been doing a lot of single-tenant net lease restaurants like fast-food restaurants, as well as medical office buildings. I started doing some resorts as well.

What kinds of investor clients do you help? Is it both brand-new investors and seasoned? Do you differentiate between the two?

Most of my clients are seasoned investors, but I also assist newer investors.

There’s a lot of information for folks. I’m going to say multifamily again because a lot of folks understand it. There’s a lot of information to learn how to start investing in that area but not in the triple net space. That’s probably one of the reasons why I wanted to talk to you, too, because I don’t know as much about this space. There’s a lot more chatter about it in my own network. Where do you recommend that people get educated so that they feel comfortable pulling the trigger on this type of investment?

Triple Net Lease Investments: When interest rates rise, we see cap rates rise. That’s another reason why now would be a good time to sell your property.

I have got a show that’s all about commercial real estate. We talk a lot about triple net investment deals. You can check that out at DanOnTop.com. It’s a good resource. We have got 160 episodes or so of great guests from all over the world talking about real estate.

Are there any other special books or training that you would recommend besides that as well?

Alan Fruitman has a good book, The NNN Triple Net Property Book. I would recommend that as well.

For folks that are new in real estate investing, I know that it’s hard for them to get the attention of a commercial real estate broker in the multifamily world. I’m assuming it’s the same over in the triple net lease investment world as well. What advice do you have for new investors to get the broker’s ear that they are serious that they want to pull the trigger and get an investment?

They should be forthright about it. If they are looking for information, they should state that. If they are a serious buyer or seller, they should let the broker know to have a good usage of their time and resources.

In terms of your own investments, you mentioned that it’s mainly in commercial versus residential. What types of things are you investing in and why?

I’m not investing in commercial real estate.

Are you investing at all on the residential side?

It’s not very much there. Occasionally, I will look at a residential property potentially for a flip.

I’m a residential real estate broker. What made you become a commercial real estate broker? I don’t know as many as I do who are residential real estate brokers. Were you looking at one or the other or did you know already you wanted to be commercial?

I had done a lot in residential on the investment side. There are a few reasons. One, the fees are larger in commercial real estate. Two, typically, I’m dealing with less emotionally motivated investors than I would be if I were dealing with residential agents. That was all important to me. I also felt that I had access to a broad inventory being that we sell property all over the country.

What is your target client avatar of folks that you are helping in your real estate brokerage business?

It would be anybody who owns net lease investment properties.

How pandemic-proof is a triple net lease investment? Are there any asset types inside the space that are more recession-proof than others?

Many of our assets have fared better during the pandemic. Cap rates on pharmacies have gone down significantly. They have seen a major shot in the arm. Thanks to vaccines being rolled out. Dollar stores have also kept seeing their cap rates compress largely due to the fact. Those are essential retailers. They were open for business during the entire pandemic pretty much. Tire stores or automotive supply stores have also seen a decrease in cap rates. The industrial sector, in general, has seen a marked decrease in cap rates.

When you are helping sellers evaluate their property, let’s say it was a shopping center. How do you even figure out how much it’s worth?

For a shopping center, I will need to take a look at the rent-roll and the profit and loss report. What I will do is I will take a look at other comparable properties. I will put together a proposal that outlines exactly what we feel the property is worth. That’s based a little bit on data and experience. It’s a blend of the two.

Is it fair to say that a lot of these leases are about ten years or even longer? What is a typical time frame for a triple net lease from a tenant?

Many of the leases start at 10, 15 or 20 years. They can have time burned off of them. For multi-tenant shopping centers and stuff like that, sometimes you will see 3 to 5-year leases. In general, these are very long lease terms.

I have never seen a contract for one lease agreement. How do they adjust? Are there already built-in adjustments for rent increases? How does that work?

Triple Net Lease Investments: Read all the fine print in the lease so that there aren’t any co-tenancy clauses or things you might not be aware of.

Some properties like dollar stores typically are flat leases and many pharmacies are flat, meaning there are no bumps. Most other triple net leases have built-in rental escalations at a certain percentage per year or in some way of following the Consumer Pricing Index.

When you are talking to sellers when they are considering selling and if they are figuring out if right now is the right time to sell or should they wait 1 year or 6 months, how do you guide a seller through that process?

It’s all based on what they need. At this point, it’s a hot market. Things are flying off the shelves. If people have properties, they want to know what they are worth because it’s a great time potentially to sell the properties.

For folks investing in this space, what are the things they do to diversify their triple net lease investing portfolio? Are they diversifying with different asset types in that space? Is it diversifying tenants or locations? What do you advise people on that?

It’s good to have a diverse portfolio. I advise people if they have a lot of fast-food restaurants, maybe it makes sense to add a dollar store. If they have a lot of dollar stores, maybe it makes sense to add a pharmacy. Certain investors are bullish on a specific triple net asset class, and that’s what they do. It’s to each their own.

Are you noticing that many triple net investors are mainly only doing that or are they also doing multifamily as well? What are you seeing with your own client base?

It all depends. A lot of my clients are well-diversified in other asset classes as well. There are some that are highly focused on the triple net.

What are your thoughts on this space over the next decade even? How do you feel about any developments in the space at all?

We will have to see interest rates are scheduled to rise 3 or 4 times in 2022. Typically, when interest rates rise, we do see cap rates rising. That’s another reason why now would be a good time to sell your property. It’s hard to predict moving forward with too much accuracy.

Out of curiosity, I know that you have been helping a lot of folks to get investments. Any horror stories of folks? Maybe it’s not even a few of those you helped but other folks that you have heard stories of in the space. I don’t understand all of the pitfalls. What kinds of things can go sideways in this type of investment if there is anything related to that that you could even share?

I did have a deal that was a shorter term. It’s a Wendy’s deal where we were under contract. I was representing the seller. During the due diligence period, the tenant reached out to the buyer unbeknownst to myself or the seller, indicating that they had no intention of staying in the property. Typically, that type of information wouldn’t be shared with a buyer. That blew that deal up because the buyer had hoped they would stay. Having had that revelation caused them to change their investment strategy for that deal.

In terms of your brokerage in your team, I’m curious about how you run your business. More so because I’m a residential realtor, I have no idea how it works on your side. How do you source your leads? How big is your team? What are the roles that people play?

A lot of the lead sourcing is done by creating databases of the owners of specific properties and then calling or emailing them. I do get inbound leads from my show on commercial real estate. In terms of the team, we have one intern and two brokers. They are doing their cold calling, sending out emails and sourcing deals that way.

What type of advice do you have for somebody that’s an aspiring triple net lease investor that’s starting off this journey? What advice would you give to them? Where should they start?

Make sure you start with a good broker. It’s somebody who knows the industry and who is going to have your best interest in mind. That’s important. Make sure that you read all the fine print in the lease so that there aren’t any co-tenancy clauses or things that you might not be aware of.

I’m going to go back and backtrack a little bit because I don’t even know what co-tenancy means in this space. Can you elaborate on what co-tenancy is and why somebody should be aware of it?

One of the first deals I worked on was at PetSmart. The owner of PetSmart had no idea that there was a co-tenancy clause in the lease. A co-tenancy clause means that in this example, the anchor tenant was Lowe’s or Walmart. In the event that they would vacate the shopping center, PetSmart will be able to decrease their rent by 50% immediately. The owner didn’t even know that when he bought the property. When I was doing an evaluation for him, I brought that to his attention and showed him how that would have an impact on the cap rate if we were to list the property for sale.

In terms of getting your deals, you do a lot of cold calling. How important is networking to get your business?

Networking is very important, especially on social media. I tend to utilize LinkedIn a lot for my networking with potential clients and other brokers. For me, that has been a great lead source.

I want to jump into some other final questions that I wanted to ask you. What are you excited about in your business?

Triple Net Lease Investments: Networking is very important and has been a great lead resource.

I’m excited about 2022 to see what it brings. I’m excited for people that are getting into the space and hopefully becoming very successful at it, either as investors or brokers.

Any big goals you are working on this 2022, personal, business or both?

My personal goal is to strengthen my marriage with my lovely wife, Brady. My business goal is to help some of my new agents to succeed.

I like to ask this to my guest. You can answer it any way you want. What does success mean to you?

Success to me means fulfillment, happiness and enjoying what I’m doing.

What is your superpower that has contributed to your success?

I like to say it’s my smile. My smile comes through when I’m talking to people.

Any last words for our audience or any information? Anything you wanted to share or direct them to?

If there’s anything I can do to add value, please reach out to me. I’m happy to have a conversation or discuss how I can add value in any way possible.

How can somebody get a hold of you?

You can call me at (248) 943-2838. You can also check out my website. It’s DanOnTop.com. We also have a course for people who want to learn about commercial real estate brokerage. That’s called CREProCourse.com.

In that course, is it specific with triple net lease investing?

No, it’s not. It’s commercial brokerage in general.

Is it directed towards real estate investors or brokerage businesses or both?

It’s agents and investors. It’s mostly agents.

Dan, thanks for being on this episode. I enjoyed our conversation and learned a lot. I value your time and knowledge. To my readers, feel free to reach out to Dan directly. Reach out to him for questions. Thank you for checking out this episode of the show. Remember to leave me a review on iTunes as it helps me attract even more great guests like Dan. Until next time, live life abundantly.

Important Links

• Encore Real Estate Investment Services
• Todd Sulzinger – Previous Episode
• The Lewkowicz Group
• Disability Made Easy
• DanOnTop.com
• The NNN Triple Net Property Book
• LinkedIn – Dan Lewkowicz
• CREProCourse.com
• iTunes – The School of Cash Flow

About Dan Lewkowicz