A conversation between Gordon Lamphere, J.D. of Van Vlissingen and Co. and Sean Hostert, principal, investor, advisor, and founder of Net Lease Observer. Transcript edited for clarity.
Sean Hostert: The fundamentals and the performance of net lease over time have been very good. As an example, if you look at the twenty or so longer-term listed net lease REITs that have been out there, some with thirty years of public history, some with five to ten, the typical total annualized return as a public company is ten to eleven percent on an average basis. There’s a range in there, but if you think about an investment that can provide you ten percent total return on an annual basis, with volatility because it’s a public company, and with half of that, call it plus or minus five percent, coming as a monthly or quarterly dividend, that’s pretty attractive.
Gordon Lamphere: Today on the Real Finds Podcast, I’m joined by Sean Hostert, principal, investor, advisor, founder of Net Lease Observer, and one of the net lease industry’s leading analysts. Between Sean’s transaction volume and his industry analytical experience, if you’re interested in net leases, today’s podcast is a must-listen. Thanks for hopping on today.
Sean Hostert: Honored and excited to be here. Appreciate the invite.
Gordon Lamphere: So, why real estate?
Sean Hostert: Very good question. There was no master plan, I would say. I grew up in a household focused on education and business in general. My dad had a small excavating business. We lived out in your neck of the woods in Kendall County, Illinois, and really had no inclination for real estate other than the eighty acres of farmland next to us and the couple of acres we had. I knew I wanted to be in the business world, went to school down in Champaign for finance, and started my career coming out of the ’08 financial crisis, helping one of the big four accounting firms, PwC, advising mortgage servicers. It was really just a job to travel, to learn, and to work for interesting people. Then in 2013 I got introduced to Cole Capital, a net lease non-traded REIT platform here in Phoenix, Arizona, and the rest is history from there.
Gordon Lamphere: So what got you interested in net leases? There are a lot of different paths in real estate, but net leases are kind of a specific path.
Sean Hostert: Before I joined Cole in 2013, I had no idea what a net lease was. I had never heard the phrase. I actually started in the FPA, the financial planning and analysis group, so it was more about understanding how the business itself makes money. We were a sponsor and manager of private REITs. Although I learned a lot about the real estate early on, I was really focused on the business side of it. What attracted me was, first, I didn’t have to travel incessantly like I did for PwC, and it was a base in Phoenix, where I’d moved in 2013. What differentiates net lease a bit, and I think we’ll get into this, is that it really does have a finance focus because of a lot of the characteristics of the structure. It sits at this interesting intersection of fixed income and real estate, or tenant credit and real estate. For me personally, I grew up more on the finance side of business, and that’s what got me interested, less so than maybe the sticks and bricks.
Gordon Lamphere: I grew up more in a property management context, so I think this podcast will be useful for a lot of our listeners who deal with property management. What gives net leases that unique financial flavor?
Sean Hostert: Maybe it would be helpful, Gordon, to give some context on how to think about net lease. Everyone has a slightly different definition, and some will call it triple net, net lease, or single tenant net lease, STNL. Unlike most of the commercial real estate you guys talk about, net lease is not necessarily defined by the property type. When you hear from folks on CNBC or in the brokerage world, they’ll say, I’m an office specialist, retail, industrial, multifamily. Net lease has variety within the property type, but it’s differentiated by that lease structure. Net lease means the landlord receives the rental payment net of any costs associated with operating that property. In addition to that nuance, net leases are typically, at least at origination, long-term in nature, so think ten to twenty years. The physical attributes are often a single tenant, one user leasing a property on a separate parcel. Although you do see net leases in some multi-tenant facilities with shared walls, the core net lease business is one property, one building, and one tenant operating it. It really is more of a financing structure, given the long duration of that lease, than, say, a multifamily deal.
Gordon Lamphere: With all of that, since it’s generally agnostic, how should an investor look at this? Is an investor looking primarily at the balance sheet, or at the building? How should an investor dip their toe in the water when they start looking at investing in a net lease?
Sean Hostert: A really deep and nuanced question with a lot of angles, Gordon. I’d first say, what are the common properties or opportunities that would come across your desk if you were interested in investing in net lease? Then we can touch on how you’d think about underwriting them. Traditional net lease would be spread among retail assets, industrial assets, some healthcare, some experiential and gaming, and then an “other” bucket, which might include single tenant office. There’s a post office REIT that buys postal facilities. You have land and agricultural facilities, so think wineries. So it’s a variety within the core traditional buckets. Retail, think Dollar General, AutoZone and O’Reilly, convenience stores like Speedway, Wawa, Circle K, and the typical restaurant concepts from Chick-fil-A and McDonald’s to your more local fast food or coffee. The industrial bucket, you’re thinking FedEx, Amazon, DHL, your local manufacturing company. Industrial outdoor storage has a net lease component to it in a lot of ways, so those can fit in the net lease bucket too. Healthcare could be vet clinics, urgent cares, medical office buildings. One of the more unique examples people don’t always appreciate: think about the Las Vegas strip. Caesars Palace, the MGM, the Cosmopolitan, these are single tenant properties actually owned by private or public REITs. Top Golf, movie theaters, Lifetime Fitness. The exciting part from my seat, and the part that interests a lot of individual investors, is that you’re involved with these properties really every day, oftentimes five or ten times.
When I think about how to underwrite these, and where I spent time underwriting them at a couple of large REITs and an emerging fund, you really have to understand what your goals are and how to fit those goals to the type of property you want to buy. You can play around with your risk tolerance. You could do value-add net lease in a certain sense. What would that be? Maybe a short-term lease where you don’t know if the tenant is going to stay, and you have another tenant in mind, or you think you can extend the existing tenant. The traditional core bucket of net lease is mostly long-term deals, so think sale leasebacks or existing ten-to-twenty-year leases. Those fall typically on the lower end of the risk spectrum. You have a fixed rental stream that often has escalations, maybe two percent per year or ten percent every five, so you know your cash flow stream and you sort of know your upside. The cap rate will move around. That’s an important point: unlike a lot of traditional real estate, net lease, because it’s a perpetual cash flow, is priced on a yield basis. A capitalization rate really assumes your cash flow is going into perpetuity, so you price it off a yield, whether it’s a seven cap, a six cap, whatever it may be.
When you think about underwriting, you want to understand: is the tenant going to be there for the long term? Can they afford this rent? Do they have a sustainable debt load? Maybe they’re credit-rated by S&P or Moody’s. Maybe they’re a big company, maybe a local mom and pop. How does the rent fit the market? How do the property and real estate fundamentals fit, access and all the typical things you’d look at as a real estate buyer? And then that lease structure. So to summarize: tenant credit as one bucket, real estate fundamentals, and then the lease structure.
Gordon Lamphere: Let’s dive into lease structure, because there are a lot of different ways to structure a triple net. What are some of the common lease structures you see?
Sean Hostert: Absolute net leases, absolute triple net leases, are probably the most common in the single tenant world. What does that mean? Triple net, to refresh: real estate taxes paid by the tenant. Property and liability insurance paid by the tenant, usually naming the landlord as additional insured. And the third bucket, maintenance and capex. The roof leaks, you need to repaint the building, the windows need replacing, whatever it may be, those costs are borne by the tenant. Not only the costs economically, but the responsibility to do those items and pay them directly. That creates a passive nature for the landlord. That’s typically why a net lease should have a lower rental rate than a gross lease, because with the net lease the tenant pays the taxes, insurance, and maintenance to build up to what a gross lease rate would be. So the landlord’s net number is lower.
Those lease structures are often long-term, often have fixed rental escalations, and put responsibility for operating the property on the tenant. But there are even more nuanced legal and economic aspects folks tend not to think about in a cursory review. Oftentimes the tenant is reporting financial information. I’ve got one tenant on this property, my income stream is solely dependent on Dollar General or AutoZone or Amazon, so I want to understand whether that’s a public or private company and its financial footing. Maybe I’m getting annual financial statements. If it’s a profit-center piece of real estate, think of a restaurant, oftentimes the tenant reports sales, maybe even a full P&L annually or quarterly, so you understand whether it’s a profitable store for the operator. Then you get deeper into the legalese: assignment, change of control. Can this tenant assign the lease and be released? What happens if they’re bought by another business? What rights do I have as the landlord? Can the tenant go dark, meaning close the store? They’re still responsible for the rent, but would that be an event of default? So you get into a long list. The financing structure almost has covenants, or attributes similar to a mortgage, in the sense that the lease is a little more detailed.
Gordon Lamphere: Let’s get into where we see net leases popping up in traditional leasing portfolios. One thing we’ve seen increasingly in the post-2020 era of less liquidity is that many of our industrial clients have explored sale leasebacks and ways to uniquely finance corporate expansions, or to finance things in general. Can we dive into what you’re seeing in the world of sale leasebacks and how those play out in the market?
Sean Hostert: Certainly. The sale leaseback has historically been a meaningful part of the net lease business. If you take a step back and think about the ways to buy net lease deals directly, sale leaseback is one of them. To your point, the owner of the property is the user. They sell the property to a third party, let’s say it’s the Gordon REIT, and then Gordon simultaneously at closing signs a lease, and that seller becomes the tenant and continues to operate. There’s no real change in operations. That’s the true financing structure of net lease. The second way to buy net lease would be assuming an existing lease. The Walgreens down the street is under lease, owned by a third party. You as the buyer buy it from that third party. The tenant probably doesn’t even really know, other than sending their rent check somewhere else. The third and final would be development financing, call it reverse build-to-suits or forward takeouts, where a new property is being built and the future landlord provides capital during construction or agrees to buy at a future date at a fixed price. That gives more visibility to the developer.
To your question on sale leasebacks, historically it has represented, call it, ten to twenty percent of the market in terms of overall net lease. Maybe this is a good time for context: net lease is about a fifty billion dollar a year reported transaction volume, call it ten percent of overall commercial real estate activity in the US. Take those numbers with a grain of salt, because a lot of folks don’t like their transactions reported, and every state has different disclosure rules, so they’re likely understated, but it’s a good proxy. In 2021, like a lot of markets, net lease saw huge growth, around a hundred billion. We’re at about half of that in recent years, more in line with that mid-2010s time frame.
The sale leaseback is exciting for a variety of folks who own the real estate they operate out of. There’s been a proliferation because of private equity’s insatiable demand to buy operating businesses. A lot of these private equity firms are very rational about asset ownership. If they can buy an operating company that owns real estate at maybe a six to eight times multiple on EBITDA, say an old-world industrial manufacturing business, they can turn around and sell the real estate to a REIT, a fund, or a private investor at a seven cap, which is a fourteen times multiple on rent. There’s a valuation gap that makes it make sense to do that deal. There are other things to consider, so I don’t want to oversimplify, but primarily when you have groups that own real estate and trade at a low multiple, the sale leaseback can make a lot of sense. The other aspect would be in the context of an M&A deal, done simultaneously or after the fact.
The other noteworthy thing: historically, if you owned your real estate you could get a mortgage at maybe sixty-five percent LTV, and for a period those were very low rates, very accretive from a cost-of-capital perspective. With a sale leaseback, an investor pays you a hundred percent of market value, so you’re increasing your leverage capability, levering the asset at a hundred percent as opposed to sixty-five. There’s no refinancing risk. You sell your property, sign a fifteen-year lease, and at the end you have the option to just walk away. You don’t have to repay debt as you would with a mortgage in five or seven years. That creates more optionality for the user, and they’ll have tenant extension options on top, so probably forty to fifty years of control. There’s tax efficiency, too. I’m not a practicing accountant, but rent is a hundred percent deductible for IRS purposes, versus interest, which is typically capped, I believe, at thirty percent of EBIT. For highly levered companies, that can be interesting. There are no covenants, no refinancing risk, and if rates move around, you know your rental schedule.
There are a lot of benefits for the seller in a sale leaseback. The last thing I’d say, Gordon, is it’s not for everybody. If you’re not committed to that site for the long term, you may want to rethink it. If the seller has an extremely low basis, there’s a capital gains issue. A lot of companies that have owned their building for forty years have depreciated it down to zero, so they may sell for five million dollars but have a massive tax bill. It’s a source of capital. I’d liken it to other financings: it competes with lenders, with mezzanine financing, with other forms of equity, but it’s non-dilutive to the owners of the company, and in that sense it’s very attractive.
Gordon Lamphere: When we start looking at potential triple nets as an investor, what are some of the typical terms you see in things like rent bumps and cap rates? What should you look out for when you’re looking at an average OM?
Sean Hostert: A lot of variety, much like what you see day-to-day, and a lot of it is dependent on the tenant industry and legacy industry norms that have continued. On rental escalations, you see everything from flat, no escalations, which historically would be your older legacy Walgreens, pharmacies, CVS. You’ll see five to ten percent every five years in certain deals; ten percent every five equates to roughly 1.4 percent a year on a fifteen-year lease. Then you’ll see annual escalations in certain deals, two to three, even three and a half or four percent. Historically, industrial has seen higher rent bumps than retail. Part of that is margin, part is the amount of occupancy cost in relation to sales. We saw a change, at least on the sale leaseback side, because these leases are newly negotiated, a brand-new originated document off somebody’s form. During the inflation rise of ’21 and ’22, buyers were saying, I need more escalation to justify the cap rate I’m paying, because the cost of everything is going up. There’s a balance struck, but typically ten percent every five, and one and a half to two and a half percent, is pretty normal. You do see some leases linked to CPI, which can be attractive; they may have a cap or not. Tenants are aware of their exposure and want to be thoughtful about how to set that up.
On cap rates, the range is again very wide. You’ll see Chick-fil-A, McDonald’s, and ground leases trading in the high threes to low fours; those are exchange buyers, all cash, small price-point assets, typically sub-five-million-dollar. Then you’ll see higher-quality assets that are bigger in price point, or have a middle-market smaller credit, in the seven to eight percent cap range. The challenge when you look at the market in general is you’re pulling all different lease terms. Even if you said you want to look at all the AutoZones that traded, it may be a one-year remaining term where the buyer knows the tenant is leaving, or a twenty-year ground lease in California, or one in Florida. There are so many variables with net lease. That, to me, is what makes the business interesting; you’re trying to triangulate what makes sense from a yield perspective.
Gordon Lamphere: Let’s talk about who’s buying these leases typically. In our less-net-style-lease practice, I tend to see a much more diversified group: investors, family offices, some large REITs, or occupiers. For the triple net and net lease world, from my vantage point it seems more institutional as a whole. Is that true, or am I just seeing a little corner of the market that’s shaded my perception of who the average triple net buyer is?
Sean Hostert: It’s definitely varied across the type of net lease deal. Let me give a couple of examples and frame the industry. The publicly listed REITs buying single tenant, that’s their primary strategy. Definitions vary, but I’d count somewhere in the neighborhood of twenty-five listed public REITs. They have a total enterprise value around two hundred seventy-five billion dollars, equity value around one hundred seventy-five billion. Then you have an entire class of institutional investors managing and sponsoring funds, private REITs, or other structures. That could be former public companies that have gone private. Certainly in the last five to six years, we’ve seen a surge of interest from a variety of large blue-chip asset managers, banks, private equity firms. Those groups are a little hard to track because not all report publicly, but it’s a meaningful and growing number.
The part of the market that’s harder to conceptualize or track is the private individual and private capital market, and that market is very large. Based on the data available on single tenant, call it half of activity is from private capital. That incorporates a lot of different folks: individuals, high-net-worth investors, small family offices, potentially users buying single tenant deals, developers. So the market is very fragmented, and despite fifty-plus years of net lease, the institutionalization is still, I’d say, in somewhat early days, and it remains very fragmented. Those deals are hard to track inherently, so the data there isn’t as good as what you see with the institutional market. There’s a bit of an availability bias, Gordon, in that you see the names of the big companies, the press releases, the reported information, so we have all this available data. I’m guilty of that too. I write the Net Lease Observer, spend a lot of time researching it, and that’s the information that’s available, so oftentimes that’s what you can reference.
Gordon Lamphere: I’m very open to acknowledging my own biases. Speaking of biases, there’s been a bias against some of the large institutional capital rush we’ve seen into the market, names like Blackstone and Apollo. Are we seeing a surge in their presence in the net lease market, and if so, why?
Sean Hostert: The short answer is yes, and it goes back to a couple of things. The first is that net lease as an asset class has performed well over cycles. The baseline of what you’re buying is a long-duration cash flow stream backed by a tenant committed to that site, with real estate collateral behind it. It’s like you’re a long-term lender, but if they default you have a hard asset behind it, so your cash flow is fixed and likely growing. You can finance the assets: if I have a ten-year lease with a solid credit, there are a lot of banks, alternative lenders, and insurance companies that will lend on those. It’s a stabilized asset class. The fundamentals and performance over time have been very good. As an example, if you look at the twenty or so longer-term listed net lease REITs, some with thirty years of public history, some with five to ten, the typical total annualized return is ten to eleven percent on average. There’s a range, but an investment providing ten percent total return annually, with volatility because it’s public, and with half of that coming as a monthly or quarterly dividend, is pretty attractive.
From the asset manager perspective, a couple of things drive it on top of the fundamentals. First, it’s a very scalable business, because the tenant is responsible for managing the asset, paying taxes and insurance, fixing the roof. You can scale quickly with a small team. In theory it’s mailbox money, and candidly, Gordon, I hate that phrase, because it makes it seem like you don’t have to do anything. There’s still work to manage these assets, but compared to multifamily, or a large office building with multiple tenants, you in theory have no capex risk and a long-term lease, so you’re not constantly churning a new apartment every year. The management responsibilities are much lower, which allows you as a sponsor to grow quickly, which increases fees, and to do it efficiently. The third bucket is more of a generational demographic shift, which is pretty clear: an aging population with limited options for stable income. When you think about the baby boomers and the insatiable need for yield, particularly in a lower-rate environment, net lease is really attractive.
Sean’s point about aging demographics and yield demand connects to a theme we explored from the office-demand side in Five Generations, Five Submarkets: How to Pick Chicago Office Space in 2026.
Gordon Lamphere: That’s very informative. One thing our listeners have learned a lot from is our Final Four. It’s a great opportunity to learn more about our guests and their area of expertise. One question I find most insightful: what are we not talking about enough in the real estate industry?
Sean Hostert: Great question. I’ll take it in two directions. The first is short: within net lease specifically, it’s still early innings of adoption and education. People understanding the asset class, where it fits for them and where it doesn’t, because it doesn’t make sense for every investor and every risk appetite. Despite the private capital surge, people just aren’t talking about net lease being ten percent of commercial real estate and growing. The second area, more broadly, and maybe it’s my tilt toward finance, is the yield curve. You hear incessant reference to the ten-year Treasury, and that’s certainly an important metric, but I’ve been fascinated watching the yield curve, particularly the middle duration, the two, three, and five-year Treasury rates. Year to date, the ten-year is up, depending on the second you look, twenty-five to thirty basis points, in that mid-four-and-a-half-percent range. The two-to-five-year tenor is up fifty-plus basis points. If you think about larger institutional groups all the way down to individual investors, three-to-five-year loans are pretty common. For properties and deals we’ve done with friends and family, I’m talking to banks and they’re quoting the five-year, not the ten-year. So the pressure on rates moving up, particularly in the middle of the curve, probably doesn’t get enough talk, whereas the ten-year is talked about all the time.
That distinction between headline ten-year rates and the middle of the curve is exactly the kind of financing nuance shaping deals across Chicagoland right now, which we track in our State of the Chicagoland Commercial Real Estate Market for Q2 2026.
Gordon Lamphere: That’s probably some good advice. We find a lot of advice from our experts, who tend to know where things are going long-term, or at least have a hunch. If you had a hunch about what will change the most about the commercial real estate market in ten years, what do you think it’ll be?
Sean Hostert: Complete speculation, so I’ll preface it with that. Living in Scottsdale, Arizona, self-driving cars, particularly Waymos, have become ubiquitous. I have a ten-minute drive to my office, and I probably see three to five on that drive. They’re everywhere. I think the impact of self-driving cars is very fat-tailed. What do I mean by that? Although I don’t know the probability of mass adoption in the time frame, the impact could be massive, so even at a lower probability it needs to be considered. Think about the implications for real estate broadly: parking requirements, zoning restrictions, residential development, the need for garages in your home. Businesses that depend on drive-throughs, quick-service restaurants, coffee shops, repair and collision shops, insurance companies. If you’re sitting in the back of your car and it’s driving you to work, you’re like the Lincoln Lawyer, you have a private driver who doesn’t get tired and doesn’t need benefits. What happens to short-haul flights? If you’re going from Dallas to Austin, that zone where the drive is kind of far but the flight is annoying by the time you wait at the airport, what happens to those plane rides if I can use a Waymo, sit in the back, sleep, work, whatever?
On a personal basis, Gordon, I think a lot about whether we can get rid of some of these concrete fields of parking and add greenery. A lot of America has become a parking lot, and taking that to its extreme is going to take time. The technology still needs work. Phoenix has been a test ground partly because it’s a very grid-oriented road system, east-west, north-south, so it’s easier for the model. But over ten years, adoption could change immensely, and the impact is potentially massive.
Gordon Lamphere: I don’t disagree. For us in the Midwest, in Chicago and Wisconsin primarily, I don’t worry about the Waymo coming. I think it’ll be a great asset, but as it’s currently constructed, it’s going to have some issues with ice and snow. Those kinks will be worked out probably within a decade or two, but until then I’m happy to get in a Waymo in Arizona; I’m not sure I’m happy in Green Bay, Wisconsin in the winter. In terms of that, if you could travel back to the start of your career and give yourself one bit of advice, other than investing in Waymo, what would it be?
Sean Hostert: This is tangentially career-related, but I would have told myself to ask my wife to marry me sooner. Careers, jobs, markets, they’re how you make a living and obviously a significant part of life. But the most meaningful part is finding a partner to share that journey with, to share the career wins and the ups and downs. I would have told myself to act a little faster on that side of things.
Gordon Lamphere: I’d probably give myself the same advice. When I was getting ready to marry my wife, I got some advice from one of our business partners, one of the wealthiest people I know and very successful in a lot of endeavors. He said, if you find the right partner, and he meant partner both as a spouse and because your spouse is your largest financial partner, don’t run away, just lock them down. For anyone listening who has a great relationship that could be a long-term partner, lock them down. It’s not worth playing the market at a certain point.
Sean Hostert: Well said, Gordon.
Gordon Lamphere: If we’re playing the market for our next guest, many people go out and struggle to find the people really influencing the world of real estate, because they don’t know the right voice to talk to in each niche. We bring a lot of great voices on like yourself, and they tend to have unique views into who else is moving and shaking in their corner of the world. So if you’d recommend one guest to come on next, who would it be?
Sean Hostert: You’ve got me on the spot, Gordon. Because I spend so much time in the net lease world, I don’t have as much time to think through broad topics like your question about what could impact CRE the most. If it were me, I’d look at folks tangentially related to real estate, whether that’s someone who works on technology around driverless cars, or people at the cutting edge of things with mass-adoption potential to impact the way we consume goods and entertainment. If you could get somebody from the owner of the Sphere, I think that would be fascinating. I don’t know anybody over there, but if you think about entertainment and real estate at an intersection, in recent years that’s probably the thing that comes up most in conversations. They took an idea that probably sounded absolutely ludicrous at conception and turned it into something hundreds of thousands of people have been through and millions talk about. Find somebody, I think it’s MSG or whoever owns the Sphere, and get them on.
Gordon Lamphere: If anyone listening has a contact, you can always DM or reach out to me on various platforms. Before we go, if somebody wants to reach out to you, what’s the best way to get in contact?
Sean Hostert: The Net Lease Observer is the core area where I’m spending time on net lease content. Simple website, netleaseobserver.com. We have a podcast as well that focuses specifically on net lease REIT CEOs and other stakeholders and executives in the industry. And you can email me, it’s just Sean at the Net Lease Observer domain, which you’ll see on the website.
Gordon Lamphere: Sean, thank you very much for coming on today. We have to have you on again in the future.
Sean Hostert: Thanks, Gordon. Have a great one.
Gordon Lamphere: If you enjoyed the podcast, please give us a like, a five-star rating, and a review. Your comments, interactions, and subscriptions truly matter and help us get quality guests. You can find us on YouTube, Spotify, or wherever you get your podcasts. I’m Gordon Lamphere, the Real Finds Podcast. Thank you for listening.
Van Vlissingen and Co. has been the Midwest’s oldest commercial real estate brokerage, development, and management firm since 1879. If you own, manage, or invest in single tenant, net lease, or industrial property across Lake County, the North Shore, the Northwest and O’Hare corridors, DuPage and the I-88 corridor, Will County, or southern Wisconsin’s Pleasant Prairie, Kenosha, and Racine markets, contact Van Vlissingen and Co. at 📞 847-634-2300 or 🌐 vvco.com. For more on where industrial demand is heading, see our conversation on industrial real estate’s next decade with Chad Griffiths.