What Triple Net Leases Are and Why Investors Love Them

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Show Summary

In this conversation, Bruce Bean, a commercial investor and leasing expert, shares insights into the commercial leasing landscape in the Bay Area. He discusses his extensive experience in various segments of commercial real estate, including industrial, retail, and office leasing. The conversation highlights the current trends in the market, the importance of tenant relationships, and the opportunities available for investors in commercial properties. Bruce also provides advice on navigating investor relations and finding suitable commercial spaces for leasing.

Resources and Links from this show:

• • • Investor Fuel Real Estate Mastermind
    • Investor Machine Real Estate Lead Generation
    • Mike on Facebook
    • Mike on Instagram
    • Mike on LinkedIn
    • The Trafton Group Website
    • Bruce Bean on LinkedIn
    • Bruce Bean’s Phone Number: (650) 888-6792

  Listen to the Audio Version of this Episode

  Investor Fuel Show Transcript:

  Bruce Bean Traftongroup.com (00:00)
  No, that’s very true. The corporate tenants have the idea or the track record that the landlord will give them what’s called a ⁓ gigantic tenant improvement allowance. So they might give them $20 per square foot or maybe $50 a square foot upfront to put in these ⁓ fixtures and equipment and TIs that they need to get their property up.

  to speed. the one thing you have to be very careful with with some of these national tenants is that they will have what’s called a termination clause which means down the road if that particular location say a Starbucks location is not performing they can basically bail out on that lease for very little cost

  Dylan Silver (02:19)
  Hey folks, welcome back to the show. Today’s guest Bruce Bean is a commercial ⁓ investor in the San Mateo, California area. And he’s with the Trafton Group they do commercial leasing sales in the Bay Area and investment sales. He’s also the host of the SF commercial property conversation podcast. Bruce, welcome to the show.

  Bruce Bean Traftongroup.com (02:43)
  Thank you very much for having me, Dylan. It’s great to be here. I look forward to speaking with you.

  Dylan Silver (02:49)
  We were talking before the show here, Bruce, about ⁓ the space that you’re involved in, the segment in the commercial space, commercial leasing in particular in the Bay Area. And I was mentioning to you that I’m a fish out of water in this space. I’ve spoken with investors from multiple different segments of commercial, but none who are doing the leasing aspect specifically. So when we talk about leasing, especially in the commercial space, this can encompass such a wide array of deal

  structures and segments. What’s some of the areas that you’ve been involved in in the leasing space specifically?

  Bruce Bean Traftongroup.com (03:26)
  So just to give you a little history here, came out of Colorado, actually Boulder, Denver area. 35 years ago, we moved to San Francisco. And I decided at that time to move from being in architecture and design to being in commercial real estate. And I went to work for what was then called the Rubicon Group, which was a commercial leasing, office leasing, and sales.

  group, a small boutique group based in San Francisco. So at any rate, I kind of cut my teeth on office leasing in what’s called the San Mateo area, which is below San Francisco in what’s called the peninsula. And I learned about office leasing at that time. And we went through a lot of listings and represented a lot of owners to lease out their spaces for office buildings. But then ⁓ I said, waited from the Rubicon group, the Rubicon group.

  transitioned and merged into TRI. TRI closed their mid-peninsula office, and so I went with Cushman and Wakefield and continued down the road of leasing. I actually started out leasing industrial space, which is an interesting kind of genre all on its own, but I was doing kind of industrial and office leasing at that time. And then eventually I kind of moved into doing what is now called

  retail leasing. So I’ve kind of covered all the segments of commercial leasing in terms of

  industrial and office and retail. We also have ⁓ worked with multifamily. We have a 22 unit multifamily project that we manage right now. And so I’m familiar with actually residential leasing on that side also. at any rate,

  Through the years, I’ve kind of gone through the whole segment and as part of that, I’ve done a fair amount of investment sales. There’s kind of three segments to investment sales. There’s the multifamily section, but there’s also what we call user sales. I currently have a $12 million property down in Redwood Shores that I’m going to meet with a user today to potentially purchase that property later on this afternoon.

  At any rate, ⁓ leasing, if we want to go back to leasing, that’s an interesting segment and ⁓ one that maybe you have some questions about.

  Dylan Silver (06:38)
  Yeah.

  Yeah, I think when we when we talk about the scope of all this, right. So industrial I know right now seems to be booming on all fronts. Investors are interested in it. And from what I understand, this is like the biggest part of the year for the industrial space with the holidays. Someone who is in the space recently on the show explains to me a lot of this is being driven by ⁓ people needing a place to store goods for you know,

  an Amazon warehouse and this type of thing, people need warehouse space. When you’re everything is being bought online, which never occurred to me, I was thinking in that industrial would be for another aspect, another another reason. But a big part of it is, you know, you’re needing a place to store goods, if you’re going to be buying everything online. But then you’ve also got so many other segments, which you mentioned, you know, multifamily, you have retail, right. And so I’ve often thought, well,

  How do those transactions work because you have an investor who maybe owns the building. Do they then have like a prior relationship with let’s say a retailer or a brand and then they’ll come in and do they broker it themselves or how often would they reach out to someone like yourself to broker that deal for them?

  Bruce Bean Traftongroup.com (08:06)
  No, typically I would say probably 95 % of the industrial market is represented by ⁓ real estate brokers or real estate agents. So there’s a small segment of people that think they can represent their own buildings and so forth. But as you say, there is a huge drive right now to fill those industrial buildings with people that are providing goods to people.

  There was a little hiccup in that in that the tariffs kind of slowed down that growth and there was a pause in that. But I think that is now coming back to some degree. And so that’s all kind of transitioning. The very hottest market right now is actually retail, which you wouldn’t really expect, but retail is very hot right now. People are kind of clamoring to find retail space. I have retail space in downtown San Mateo, which is south of.

  Dylan Silver (08:54)
  Yeah.

  Bruce Bean Traftongroup.com (09:04)
  of San Francisco and I have four or five different groups trying to lease the same space. So it’s a very hot market. The big box retailers are a little slow right now. Some of them have gone out and then the drug stores and so forth have kind of backed off from their expansion. So there’s some glitches in the retail area, but in general, retail is very hot. And then industrial is sort of the second market that’s hot.

  And then if you go to office space, office space is kind of, well, as you probably well know, has had some very high vacancies, but that’s starting to come back also.

  Dylan Silver (09:38)
  Yeah.

  Now in retail, does this encompass as well restaurants as well as that a different segment when we talk about retail?

  Bruce Bean Traftongroup.com (09:50)
  Well, it is a different segment to some degree ⁓ because a restaurant requires probably at minimum of $250,000 in investment in the equipment

  and the fans and the ovens and the refrigeration and so forth. That’s sort of a different genre, so to speak. We do have a 4,000 square foot restaurant for lease right now in Daly City, but we have had

  a lot of activity on that particular project. There are a lot of people out there looking for existing restaurant space so they don’t have to invest quite as much money in kind of ground up installation of all their equipment and so forth. So yes, yes, that is to some degree a separate segment, it is also part of kind of the retail group.

  Dylan Silver (11:19)
  Now, I’ve heard this before that when you’re going after a national, you know, corporatized retailer, ⁓ Chipotle, a Starbucks, right? The plus side is these are very good tenants that are, you know, going to be able to pay on time and pay, you know, high rents. But but you do have to have the space really up to their standard. They’re not going to take it like as is in most cases. So

  That’s oftentimes why you might see, you know, in a prime real estate area, maybe ⁓ a non corporate non national tenant there because they took it. They took it as is.

  Bruce Bean Traftongroup.com (11:59)
  No, that’s very true. The corporate tenants have the idea or the track record that the landlord will give them what’s called a ⁓ gigantic tenant improvement allowance. So they might give them $20 per square foot or maybe $50 a square foot upfront to put in these ⁓ fixtures and equipment and TIs that they need to get their property up.

  to speed. the one thing you have to be very careful with with some of these national tenants is that they will have what’s called a termination clause which means down the road if that particular location say a Starbucks location is not performing they can basically bail out on that lease for very little cost

  even though you get this great national tenant it may have some caveats in there before actually getting out of

  lease. So you have to be very careful and then there’s a whole genre of investors that want to buy these particular properties that are McDonald’s or Burger King’s or Starbucks that these are called triple net leases where you basically buy the building and you get a steady income from that building and the tenant takes care of the building. ⁓

  expenses and maintenance and so forth. So it’s a great investment if you want sort of a passive investment approach.

  Dylan Silver (13:29)
  When we talk about areas of real estate where folks immediately jump to when you think about like being a realtor, right, or someone who is involved in transactional real estate, right, people will jump to single family, they might jump to to multifamily, but commercial leasing is a segment which I think a lot of folks may be blind to, you know, because they haven’t had these conversations. But when you’re seeing an increased demand for

  industrial space. When you’re seeing, as you mentioned, increased demand for retail, I think that there is an opportunity for maybe some ⁓ folks to come into the space. You may see some migration from some other spaces as well, right?

  Bruce Bean Traftongroup.com (14:14)
  No, I think that’s very true that typically for someone coming into real estate or investing in real estate, they might start out with ⁓ a single family and start flipping single families and maybe go to duplexes and fourplexes and so forth and then maybe move up to larger apartment buildings. And that’s sort of a trend in the investment world. But there is a whole different segment out there where you could invest in, a triple net lease.

  You don’t have nearly as many ⁓ management headaches as you might have with a multifamily property that’s a fourplex or larger. So it just kind of depends on what ⁓ your inclination is and where you want to put your money and so forth.

  that is certainly an area to look at that may be different from the kind of standard approach to investing in multifamily.

  Dylan Silver (15:51)
  want to ask you specifically about ⁓ investor relations. As someone who comes from the single family space, I’m used to, you know, finding investors for maybe a single subject property, right? But then when you’re talking about commercial properties, these are, you know, funds, right? And these are people that have syndications. And so as someone, if you could give advice to other folks in the leasing space, how

  Would someone who may be newer to the space go about finding a commercial space to represent, to lease out?

  Bruce Bean Traftongroup.com (16:28)
  So I Okay, so it’s you’re talking about say you’re you’ve got some money you want to invest in a commercial space Maybe you are not inclined to invest in a multifamily approach and so maybe you want to find something else That’s a little bit Hopefully easier than managing a triple net or managing a multifamily So there are a bunch of people out there that specialize in selling what’s called triple nets at

  At the highest level, are these publicly available REITs, are ⁓ investment groups that are at the public level. At the lower level, there are syndications that specialize in say, triple net leases and so forth, or commercial leases or industrial leases. And so you can kind of get into that particular area if you start searching around the internet and find people that are specializing in these particular products that are not necessarily.

  multifamily. mean, you might find a particular group that specializes in that area and then you can kind of go from there and find how much they want. Typically, they have to invest maybe $50,000 or $100,000 to get started and then you’re going to put your money into that investment just like you would with a multifamily and hope to get your money back out in five to seven years.

  Dylan Silver (17:53)
  You know, I’ve spoken with so many people in the commercial space, I’d say over the last who over the last five years or so have either been on the side of patients or they’ve been on the side of we bought too deep. Right. And it seems like there’s a lot of there’s a lot of people who bought way too deep around 2020. Right. And you have these arm rate loans that have doubled in many cases more than that.

  Bruce Bean Traftongroup.com (18:09)
  Ha ha ha!

  Dylan Silver (18:21)
  And then you’ve got the cost of materials, you’ve got ⁓ increased uncertainty in the market, but then you’ve also got ⁓ stabilized or decreased rents. So then the properties aren’t appreciating to where people thought they were. So now I’ve seen some level of distress in the commercial space when it comes to specifically like multifamily syndication, which has.

  shown me that there’s an opportunity for investors, right? When there is some level of distress in some of these markets, there’s an opportunity for someone to come in and either make a creative offer or do some type of value add there because there’s distress on the operator side. But with that said, Bruce, we are actually coming up on time here on the show. Any projects that you’re working on or how can our audience reach out to you or your team?

  Bruce Bean Traftongroup.com (19:17)
  So the Trafton Group, you can look at our website, trafton.com, the traftongroup.com. And you can find me there. You can see what properties are available. If you happen to be on what’s called CoStar or LoopNet, you can find our properties there. I do have this $12 million property in Redwood Shores that’s available for purchase if anybody wants to get into that type of investment.

  I’d be happy to talk to them. But I, you know, out there, if they just in general want to talk about commercial leasing or industrial leasing or retail leasing or even office leasing, I’m happy to speak with them. Please give me a call at 650-888-6792. And I look forward to talking to you again, Dylan. This is very good conversation and I’d to have more conversations with you.

  Dylan Silver (20:13)
  Bruce, thank you for your time. Thanks for coming on the show.

  Bruce Bean Traftongroup.com (20:16)
  Thank you.