Bank ground lease assets have enjoyed strong demand among investors in recent months, boasting a particular set of characteristics that boost their appeal to those seeking long-term deals with few demands on landlords.
According to a Boulder Group study, cap rates for bank ground lease properties have hit their lowest level since 2004. Median asking cap rates for all bank ground leases fell an average of 85 basis points from the first quarter of 2012 to the same period in 2013, to 5 percent—a 225-point premium to the total net lease retail market sector. Median asking price for properties was $3.5 million.
Likewise, a February study by the Mid-America Real Estate Corp. found high demand for a number of common institutions, including Wells Fargo, Chase, PNC and Bank of America.
Bank ground lease properties command such competitive cap rates for a number of reasons, including their prevalence at prime locations such as corner sites or pads at major shopping centers. “You’re buying the best corners in the market,” says Tom Fritz, vice president of Mid-America Real Estate Corp.
In addition, bank ground lease sites continue to offer the perks of a true triple-net lease. “It’s rare to find an absolute triple-net lease like a bank ground lease,” Fritz says. “Most of them have way more responsibility.” Tenants have tended to have an edge in negotiations as of late and have been able to force favorable terms, such as shorter leases and putting responsibility for construction on the buyer. Bank ground leases, however, come with no such strings attached.
Banks are also enjoying strong credit—the Mid-America study lists eight banks with ratings of BBB- or better—and freestanding bank ground lease assets have the lowest default rate in the net lease sector, according to the Boulder Group report.
Finally, leases tend to cover longer terms, generally 20 years rather than 10 years, and include rent increases, often in 10 percent increases every five years.
On the downside, bank sites tend to be specialized and mostly suitable for only other banks, which can turn a property into a liability if a tenant pulls out. Due to lower yields on bank ground leases, such properties tend to appeal mainly to individual investors and to 1031 exchange investors. “The return is too low for a REIT for it to make sense,” Fritz says.
When sizing up opportunities, investors are often researching deposit volumes at bank sites, a strategy that has become much easier with the availability of such information via the Internet. As a result, “sometimes people get too caught up in the deposits,” Fritz says. “People are making a bigger deal out of it than they should.” Factors such as location and other nearby banks should also be considered, he says.
Observers say that bank ground lease properties should remain an attractive option for investors. “There’s always going to be a need when a new grocery-anchored center goes up,” says Jim Gibson, regional director in the Houston office of Stan Johnson Co. “They’re always gong to want to have a visible branch there. Pads out front are still very attractive, even if some go inline.”
Banks are also seizing opportunities afforded by online advertising, sending messages to customers’ smartphones when they come within range of a branch. “Online advertising will affect banks positively,” Fritz says.