How to Start a Net Lease Fund

In a true triple-net lease the tenant handles essentially everything, so the fund's return depends on whether the tenant keeps paying for the life of the lease and whether the building has value if they do not. Those are two separate questions and both belong in your strategy section.

Credit tenancy means investment-grade or near-investment-grade corporate obligors, which commonly trade 100 to 200 basis points inside non-rated tenants — the rent is effectively a corporate credit exposure wrapped in real estate. Non-rated and franchisee tenants pay materially wider cap rates precisely because the credit is weaker, and a fund buying those is being paid to take real default risk. State which you buy, what financial reporting the leases require from tenants, and how you monitor credit through the hold.

Weighted average lease term is the metric net lease buyers price off, and it shortens every day you hold. A portfolio bought at 12 years of average term and sold at seven is worth less per dollar of rent even if nothing else changed, which is why net lease funds that model flat cap rates through a hold are quietly modeling an improvement.

Escalations are the counterweight. A lease with fixed annual increases — commonly 1.5% to 2.5% — or increases tied to an inflation index with a floor and a cap, grows the rent line contractually. Flat rent for 20 years is a slowly depreciating asset. LPs will ask for the portfolio's weighted average escalation alongside its WALT, and a fund with a stated minimum for both is a fund with a policy rather than a shopping list.

Net lease returns are built from the gap between the going-in cap rate and the cost of fixed-rate debt, amplified by leverage. That arithmetic works beautifully when debt is cheap and compresses to nothing when it is not, which is why this strategy's fortunes track the rate cycle more directly than any other real estate approach.

The documents should state the minimum acceptable spread at acquisition, the maximum loan-to-value, and whether debt must be fixed-rate and term-matched to the lease. A fund financing a fifteen-year lease with five-year debt has embedded a refinancing event that the lease does not cover, and LPs who lived through the last cycle will ask about exactly that.

The Fund Builder models the economics — target raise, fee, preferred return with current pay, waterfall tiers, leverage limits, and hold period — so the spread assumption and the distribution schedule agree. Legal Canvas prepares the formation and offering documents with your credit policy, minimum WALT, and escalation standard carried as strategy disclosures for independent counsel review.

Because income LPs in this strategy care most about distribution reliability, having the same pref and payment cadence in the deck, the model, and the limited partnership agreement is what shortens diligence.