Commercial Net Lease Realty Inc. brings new resources to dealmakers.

The following quote from General Electric Co. Chairman and CEO John F. Welch was so well received by management at Commercial Net Lease Realty Inc. (CNLR) they decided to use it in their corporate literature.

It reads, "We have to find a way to combine the power, resources and reach of a big company with the spirit and fire of a small one."

"That [statement] gets to the heart of the concept behind our new Development Affiliate Program," says Dennis Tracy, CNLR senior vice president for build-to-suit development.

Launched in December 2000, this program enables small and mid-sized developers to take full advantage of CNLR's resources while at the same time letting them keep their independence as they go about putting together deals for freestanding retail facilities.

Background A publicly traded equity REIT (NYSE: NNN), Orlando-based CNLR makes its money by investing in high-quality, freestanding retail properties subject to long-term net leases with major retail tenants including household names such as Best Buy, Barnes & Noble, Borders Books, Eckerd, IHOP, Marshall's, Office Depot, Target, Wal-Mart and Wendy's.

The descendant of a 1980s REIT that invested purely in Golden Corral Corp. steakhouses, the company changed form and focus in the early 1990s.

Headed by president and COO Gary Ralston, the company (as of third quarter 2000) owns, either directly or through an investment interest, 276 properties leased to 59 retailers in 36 states, totaling some 6.5 million-sq.-ft. of GLA.

CNLR's array of real estate services revolves around expediting the development of freestanding retail facilities and providing retailers with the means of keeping their real estate off their balance sheets.

The company works to streamline the BTS process for client retailers, and boasts a typical 11-month project cycle running from site selection and committee approval to store opening.

At the same time, CNLR purchases commercial properties and portfolios that are net leased to credit-worthy tenants, as well as vacant and/or excess real estate held by retailers. In addition, the company provides pre-construction purchase agreements for developers, as well as property and asset management services.

Working with the right people The Development Affiliate Program was designed to get CNLR even closer to where the rubber meets the road in the freestanding retail development business.

"We created this program because we realized that while we are very strong on putting together the processes and bringing capital to bear for these (freestanding retail) projects, much of our success depends upon the real estate people that we work with in the field," says Tracy, a ten-year CNLR veteran. "If we are partnering with the right people, we are effective - and if we aren't, we're not."

In the CNLR way of thinking, "the right people" are small and medium-sized developers, entrepreneurial "deal people" that know their markets and retailers, according to Tracy.

As a group, these folks are a pretty spirited and independent bunch. And at the same time, "They're typically not into management - they don't want to open a large office, don't like to hire a bunch of people, they don't want to spend time doing things like cutting checks."

CNLR's resources constitute a good match for these fire-in-the-belly dealmakers. "We think we are a particularly good fit for the smaller developers," says Tracy, "because they are good at doing deals, but their time gets tied up in the management process."

"The Development Affiliate Program allows us to give dealmakers the opportunity to leverage their deal-making talent while retaining their independence," says Tracy. "And at the same time, we (CNLR) can leverage our talents," he says, adding "we are good at the development management process, and good at bringing capital to bear - but we need to tap into the deal people to effectively expand our operations throughout the country."

How it works While the structure of the deals done under this new program can vary depending on the players and the local marketplace, most deals will probably follow a fairly standard format, according to company vice president Doug Grady. After nine years at Dana Commercial Credit, Grady came on board to run the Development Affiliate Program for CNLR.

On the small developer/dealmaker side, "What we'll typically be looking at is a one or two-person office that has a relationship with a retailer or retailers, knows good pieces of dirt, and, depending on size of project, brings in one or several retailers," explains Grady.

Then CNLR comes on board with capital and expertise in development and construction management. "We'll pull together a budget, and run the project through the due diligence and entitlement processes," Grady says. "We'll also cut the checks to the engineers and consultants, bid out the project construction, close on it, and manage the construction," he notes, "and when the doors open, we either sell the project or put it somewhere in the CNLR portfolio."

"The main thing we have to offer is flexibility," adds Grady. "We will try to do whatever it is that our partners don't do," he says. "We can supply the capital, we can provide the management for a deal, but essentially, we are there to do whatever it is our partners either can't or don't want to do - which is an approach that gives us a lot of flexibility."

Moving forward The coming year should be a fairly busy one for CNLR and its new program, both Tracy and Grady say.

"I've reviewed a lot of retailer expansion plans, and the net-lease market may be cutting back a bit, but not a lot," notes Tracy. "There are still a lot of retailers that are going to be expanding," he says, "some more aggressively than others."

"Overall, a lot of retailers are planning for less as far as the number of buildings they want to add," notes Grady, "but at the same time, there still seem to be a lot of deals in the works."

As it rolls out its Development Affiliate Program, CNLR will be broadening the scope of property types with which it typically deals, adds Grady.

He continues to explain, CNL wants to expand this program to include any good, long-term credit-leased properties, plus office or industrial. In the past, the CNLR portfolio was predominately retail, he notes. But with a new program in place, "There are some new markets we want to take a look at and branch off into."

The construction pace of new retail facilities decreased a little during 2000, with today's retailers taking into account a number of factors in deciding between freestanding and shopping center locations.

At the end of last year, F. W. Dodge projected a slight decrease in overall retail construction for 2000, with a total of 295 million-sq.-ft. across the United States. This figure was marginally less than 1999's 310 million-sq.-ft. and barely exceeded 1998's total of 294 million-sq.-ft. No breakout of freestanding and shopping center retail facilities was available from the construction information provider. However, the Spring 2000 International Council of Shopping Center's (ICSC) Research Quarterly reported 1999 saw a brisk pace of freestanding construction being fueled by drugstore chains and retailers such as Wal-Mart, Target, Home Depot and Lowes.

Today's retailers consider a variety of issues in choosing whether to go with center or freestanding locations, notes Kris Cooper, senior director of Atlanta-based Cushman & Wakefield of Georgia.

"Some retailers, such as CVS and other drugstores, have made the decision to go freestanding on a corporate-wide basis," according to Cooper. The major strategic rationale behind freestanding locations for this group "is the ability to operate the drive-through window so customers, particularly the elderly, can pick up a prescriptions without having to get out of their cars."

Restaurants have other factors to consider. "In many cases, a restaurant will take space where it is available," says Cooper. Many are successful in both freestanding and center locations, he notes. But, "A lot of chains need to control the parking available to them - and if they are in a shopping center, they don't always have that."

Meanwhile, "A lot of the big-box retailers go freestanding because they want to do their stores according to their individual prototype - they go to a developer and get them built," says Cooper. For example, as department store retailer Kohl's has recently established its presence in the Atlanta marketplace, "It could have gone into several centers, but instead has largely built its own stores," he notes. But at the same time, "They did take an existing space in a center located in a very good, high-income submarket," adds Cooper.

In short, in today's fast-moving retail environment, retailers are very situational in their approach when it comes to choosing between freestanding or center locations, says Cooper. "They want to do what works for the particular market they are focused on."