432. The Net Lease Playbook: Institutional Capital, Sale-Leasebacks, & Market Evolution with Glen Kunofsky, SURMOUNT

0:00If you look at it in terms of like how it compares to debt, it's basically interest only money that never has to be repaid with no balloon payment.

0:12Glen Kunofsky: Welcome to the Trep Wire podcast, the show where commercial real estate meets data and insights. This is a special guest podcast. I'm Haley Keen with Trep, a data modeling and analytics firm for the CMBS, commercial real estate and CLO markets. I'm with Lonnie Hendry, chief product officer. Today, we're joined by Glenn Kanofsky, founder and CEO of Surmount, a full-service net lease commercial real estate platform providing sale leaseback, investment sales brokerage, lease advisory, capital markets, development, and principal investment. With about three decades of experience in net lease and over$50 billion in completed transactions, Glenn has navigated multiple market cycles and brings a unique perspective on the growing role of institutional capital, the evolution of sale leasebacks, and where investors are finding opportunities in today's market.

1:03Glen Kunofsky: Glenn, we are so excited to hear from you today. Welcome to the Tripwire podcast. Great. Thanks for having me. Appreciate it. So I know I ran through a little bit about your background, but we'd love to hear it from you. Talk to us about how you first got into commercial real estate as a whole and ultimately to your firm today? Sure. Well, I started in residential real estate. I bought my first investment property when I was 20 years old and a freshman in college. It was the end of the savings and loan crisis. The reason I bring it up, we still have a pretty big investment platform. And I got into brokerage really as a result of my former investing in real estate.

1:42So I bought my first investment property as a rental in college and rented it out to some roommates and stuff and paid my bills. Assumed my first mortgage was, I think,$56 ,000 at about 16.5 % and had no job and no real credit, but they would give you properties at that time. So built up over 10 years of living in Arizona. During school, I got to 27 properties. And over the next 10 years, I grew it to about 270 properties, all in Tempe, Arizona and South Scottsdale and spent, you know, from basically 90 to 2000 out there and then moved back to New York, never had worked for anybody else. And I got into commercial real estate through, I was familiar with Marcus and Millichap because they had sold some of my smaller multifamily properties, but joined Marcus and Millichap in early 2000 and started my net lease career then.

2:37So you've spent a majority of your career in commercial real estate. So So just give us some perspective. You moved back to New York. I'm assuming you've stayed in New York since then, and that's what kind of kick-started this new platform and company that you've led at this point for now, you know, a couple of decades. Absolutely. So like I said, I had never worked for anyone my whole life. I was always an independent entrepreneur, started as a broker, Marcus and Millichap, but quickly found a niche. Like today, people talk about the single tenant net lease world, like even having this podcast today, like it's amazing that people are talking about it forever.

3:10trying to explain what I did to just even people in real estate, didn't know what a net lease was, didn't know there was a net lease market. But really in that time, I found a niche, which we're still very active today, is representing tenants, sponsors, both public companies, middle market private equity, lower middle market private equity, and fundless sponsors in transactions in sale leaseback. So at that time, call it the late 90s, early 2000s, There really was no broker representation, either institutionally or privately. I saw this need of where cap rates were trading directly to really two or three publicly traded REITs.

3:52The cap rates were double digits. There was no brokers involved or any intermediaries. And they wrote the cap rate that they wanted. They wrote the lease term that they wanted. And I quickly saw that there was demand from the private market to buy these as well. So we got into representing a lot of franchise organizations, Carroll's Corp, Arby's, Golden Corral, and just saying, listen, you know, if you were buying a business, you would hire a banker, but you're doing millions and millions of dollars in real estate transactions and you don't hire a representative. So we quickly sort of made the market or I made the market at that time.

4:28It was just me and myself going to these tenants saying, list the properties with us, let us run a process and we can sell these properties to private investors and get you better cap rates, better leases and everything written in your favor. And that's how I sort of started in the net lease world. Yeah, I mean, I think it's a great story because it highlights what was a market inefficiency and how you've been able to kind of fill a void there and bring some efficiency to the marketplace. So maybe give me a little bit of perspective, and we'll get into some of the macro stuff. You talked about higher interest rates during the GFC, and I want to come back to that, so we'll come back to that.

5:03But in the Netly space, you know, what does the evolution of that look like? I mean, so now, obviously, you're not the only player in town that's doing this type of deal structuring and market transparency and creating a platform. You know, has there been an evolution where you've seen things come in tighter? Is it more difficult? Are there just more franchises available now? Like, what does that look like from when you started to maybe today? I mean, there was no one, like I was saying at the time, either doing institutional or private. But today, the whole industry has evolved. And even in the last five years, there's a ton of institutional capital pouring into the net lease space from big money market, money managers that are looking to deploy capital in a huge way.

5:43There's now, I think, 17 publicly traded REITs that are all focused on net lease properties. And then those money managers are big names like Apollo, TPG, you name it, Alliance, Bernstein, Blackstone, all now have net lease platforms. JP Morgan. So there's a lot of institutional capital. There's a lot more advisors, like you were saying. One of the things that I think we do better than anyone or our unique single tenant platform. This is all we do. is our expertise. And we access now today, both the institutional and the private market. And, you know, year to year, it's 60-40, depending on who's buying more, what the demand level is.

6:24But that means like 60 % some years are institutional transactions. And what we consider institutional today is transactions, 50 million or more. That could be small properties in a portfolio or larger properties as sort of the institutional market. And then the private market, We really deem like that to be sort of the one to$20 million transactions. And there's markets for both that we access both of those very efficiently for our clients. So sometimes in a portfolio, some will go to an institutional process, some will go into the private capital process. And, you know, that's like our special sauce of knowing where to put these properties, where the capital is going to flow in for the sellers most efficiently.

7:08and then also for the buyers, like what their needs are, what their niche is, and sort of we sit in sort of that middle ground. There's some people that only do institutions. There's some people that only do privates. We sort of just consider ourselves a net lease masters, and we can put it anywhere it belongs where it fits the timing and the right capital. That's great, and I love the way that you split that out in terms of institutional and private. But on the institutional side, I mean, are there certain structures or tenants or just footprints that make more sense for that portfolio type of institutional?

7:41I mean, it seems like, you know, we've seen some negative news over the last couple of years with Walgreens and CVS and some of these like traditional single, you know, tenant net deals going south. But for every one of those, it seems like there's been three or four of these new emerging brands, Dutch Bros or the Seven Brews or these like quick serve, you know, coffee chains. Are there some names that just when you see that, you're thinking, oh, this is probably going to be an institutional play versus a private? Or what does that look like? Like I said, we usually look at it asset by asset, transaction by transaction.

8:11I mean, you mentioned different tenants in there, like the CVS, the Walgreens. Those were sort of bellwethers of the private market. And when you say like not as popular, I mean, you look at things in some of the big publicly traded REITs and there's all public data. like those tenants are still in the top 10 of a lot of these big public REITs. And there haven't been any defaults in the drugstore space at all. It's sort of supply, demand, and cap rates. So there was a lot, that's a good example of somewhere where we would act today. The investor demand for those private drugstores is still pretty good, and the cap rates are still pretty solid.

8:48So a lot of times we'll sell from those institutions to the private market. Yes, the market has evolved technology, ordering drugs online, but like the real estate is still pretty fungible real estate and the cap rates are still pretty solid. But like today, when you're dealing with sort of like call it a Whole Foods or an Amazon warehouse that's 75 or 100 million, that falls into what we call like an institutional quality asset. And then I'll get into a little bit about the debt capital markets and how that affects institutional versus private. But the private market, even though the per asset price we bring down, some of the private transactions are now totaling$200,$300 million.

9:31We're getting families that come in that are in other asset types, like multifamily, like shopping centers. They don't have a good estate or succession plan to run capital or management-intensive real estate, and they want to come into net lease. So we're commonly representing groups in a large 1031 that are two, three, 400 million, even though they're not institutions, they're interested in the net lease and they can be competitive in a process for an Amazon warehouse, for a data center deal. The market has gotten pretty blurred of what is institutional and what is private. And that's where we sit in a sort of a unique position.

10:11No, it sounds like you definitely have your hand on the pulse. And I would agree with you. I think those lines have been blurred at some level, and it's not just in the net lease space. I think just broadly across CRE, and I think that's one major differentiation from the GFC to today, especially on the debt side of the equation, is during the GFC, like, there was no capital available. If you didn't have cash, you were not getting deals done. Today, there's this completely institutionalized private debt capital that's available that just makes, you know, rescue capital, recapitalization, preferred equity, whatever you need to kind of keep deals moving.

10:42the deal flow hasn't really subsided like it did during the GFC, even though we've seen interest rates go up, you know, at an unprecedented pace, at least from 22 to 23. So you mentioned earlier that the 8%, you know, interest rates maybe don't scare you as much. Is there some downward pressure that comes across on this sector? Like as interest rates go up, does that negatively impact cap rates or returns for these? What does that look like? Yeah, absolutely. And I think you make a good point, too. There's a difference between those two times where there was no capital available, no banks wanting to lend.

11:12Banks are still very interested in this space. Now you have debt funds. Now you have life codes that are all looking at net lease as a way to finance. But like, of course, you know, cap rates and interest rates are tied together. There's lag of sort of when interest rates rise and what short-term rates do, what bond rates do. But yeah, we've seen the rise of interest rates has come up a lot pretty suddenly. And even in the last 60 days, we've seen big spikes, which we haven't seen in a long time. And the cap rates will lag. And there's differences also between the institutional market and the private market.

11:50the institutional market reacts a lot quicker because they're calculating cost of capital. They're managing money for other people. They're calculating what their fees and management and carry is. So they move their cap rates much faster on the larger transactions. On transactions, 100 million and more, they've moved already. And there's a little bit of a buyer-seller gap that's going on right there. But your institutional sellers of this stuff also understand capital markets. So everything is relative, right? If the interest rate's higher, the cap rate's going to be higher. And then the sellers are weighing that, especially in the sell-leaseback world, of what other alternative forms of capital are costing.

12:32So it's all relative and it reacts much quicker in the institutional side. The private market, you know, lags a little bit behind, but cap rates are coming up and demand is softening a little bit in the private side because you have that buyer-seller gap in the 1031 market, not as many people entering 1031s. So really then, you know, you have more supply, less demand. The cap rate goes up because of that. And individual bank financing is harder to get on single tenant assets with lesser credit. So you're seeing that move around. but you still have a market that is a forced buy. Someone sells and they're in a 1031, they have to buy.

13:10So they're going to do less debt, more equity. They're going to be more conservative. They're going to sign up for recourse. So all those things are at play, but we're just as sensitive to interest rates as any other piece of commercial real estate. The interesting thing that people don't realize, and I know you didn't ask me the question, but I'll answer it for myself, is really like what's different in net lease is with the tenant paying all the lion's share of expenses, your taxes, your maintenance of the property, all those are inflationary and your cap rate is basically not affected by expenses.

13:44Where in other pieces of commercial real estate today, you have the expenses for the operators of shopping centers, of apartment buildings, of bigger shopping malls, of office, where your expenses have skyrocketed more than your NOI growth. A lot of people complain about the net lease world. oh, there's only one and a half or 2 % escalations or 10 % every five years, as opposed to like an apartment where you're changing your rent annually. But what I've seen time after time in this market, the expense side of the equation on those types of assets is going up much faster than the rent is going up.

14:23So at least when that lease, you have a stable underwriting of what your NOI is and your expenses aren't going to change. So I think lenders also respect that a lot more too. And that's why we see a solid amount of lenders coming into the net lease world. I think it's a great, I'm glad that you answered that without me asking it, because I think it's a very valuable point. I mean, we actually just put out a research piece in the last six weeks looking at the last five years' cumulative growth on expenses and income in NOI for multifamily. And it was like 36 % increase over the five-year period on expenses.

14:55Revenues had only gone up about 26%. And I think NOI was still positive. It was like 22%. This was weighted average. But the expense inflation is very real. And to your point, for those asset classes where you're as the owner paying expenses, revenue, top line revenue doesn't equate to NOI. But in this instance, it's a much, much simpler comparison. And it's just hard to underwrite. Like it's, you know, you take an apartment building and you could say, OK, it's going to cost, you know, what it costs to do a roof today might be$100 ,000 on a midsize apartment building. But like three, four years ago, that roof might have been 80.

15:30If you're under$80 ,000, your expenses go to$100 ,000. It's very different. With the net lease, you got 2 % increases and your tenant bears those expenses. So your return is usually real return. So that's why I think institutional money is playing into this. And then you have credit usually or underwritable party that's responsible for those expenses, not you as a landlord. So I think that's one of the reasons big money managers and public companies like this. it's hard to be that wrong, right? Like, you know, with these other types of commercial real estate expenses. And then the other big thing in a lot of this other real estate, especially multifamily, you know, which is going on all over the country is government regulation of rent rises, like New York, there's a lot of pressure, California, but other states are implementing similar things.

16:21And even if the free market allows you to raise rent, you know, you're having government interference into private markets. Yeah, we've done a lot of talking and a lot of research and a lot of writing about that. I mean, it's very real. As we've had other guests on our show, the deployment of capital is being impacted by government regulation on the multi-side. People don't want to put their money where they can't have the free market rule. I mean, if government intervenes and caps what you can do on the rent side but doesn't cap expenses, it's an asymmetrical bet that's not in your favor. We're a global firm, and we started in New York.

16:54Our main office is in New York. And a big flow of the private market where we started almost 27 years ago is people, families going from multifamily into net lease. And the argument always was, you're going to see this huge appreciation. You may not get cash flow from apartments, but they're going to appreciate. So now you have people saying, my asset didn't appreciate because the government stepped in and people can't take things to the free market. And we're seeing like, and I'm not an expert on a multi, but we have a lot of clients that were big multifamily owners in New York, New Jersey, all over the East Coast.

17:30And like the big thing was when a unit came vacant, you could bring that unit to market. And sometimes you were taking a$300 a month rent controlled or stabilized apartment to three, four, 5 ,000. That's not allowed anymore. So a lot of these people are saying, we're not going to rent those apartments because we hope some regulation changes, you're just not worth renting it for three, four,$500, you know, to cover the expenses. Let's wait until something changes. Then you're putting people in there and lifetime agreements. So we've seen that flow come into net lease. They'll say, all right, I get it now.

18:04I'm not going to see huge appreciation. I don't have that much debt. Let me at least put my money into something that I know is going to cashflow for me. So that's the growth of net lease on the private side. Yeah, it's valid. I mean, we've heard it. I'm glad that you can confirm it. So you mentioned that you guys have a global footprint. Is there a geographical preference that you've seen with buyers? Are they looking for markets? To kind of go back to the last discussion, like in multifamily, the Sunbelt for a while was where everyone wanted to be because that's where the job growth was and that's where less regulation is, et cetera, et cetera.

18:35Is net lease a little bit more agnostic to geography or do you see a little geographical preference sometimes? Again, breaking it into both institutional and private, the private market, I think, is much more real estate focused. They either want to be near where they live or they have like that preference. You know, some people are red and blue states. Some people are sunbelt versus rust belt. And you see that what we try and do is educate people on the risk and return of these things. Some like taxes are another big driver. Tax free states for the private market where people are living in a tax free state, you know, like a Florida, Texas and Nevada.

19:16They're not subject to paying state income tax on their real estate income. Those states in the private market trade at a premium because if you're a resident of a tax free state and you buy in even another tax free state, you're still not paying taxes. If you're in New York and you invest in one of those places and you're a New York resident or your company is registered here, you're still paying New York income tax. So that's a driver. Growth, you know, where jobs are going and economies are going and they're building new product, that's a driver as well. Institutional market is much more driven by returns, stability and credit.

19:49And a lot of times you can get better yields in, you know, what's deemed like lesser real estate markets. But, you know, the beauty of sort of, I tell people the four keys to underwriting net lease are real estate, credit, unit economics and lease structure. So those four things make up what your yield is going to look like. And I think you'll see institutions, you know, if it's not as great of a macro real estate investment, look at the credit, look at the lease structure, look at the return and say, all right, this is a good deal for our use of capital. And they're less agnostic. We're seeing a huge amount of capital flow also from around the globe.

20:30The United States has always been a place where people wanted to invest in commercial real estate. A lot of times that was in large multifamily hotel, large office buildings, and you had syndicators coming in who would take in that global capital, whether it was from Europe or the Middle East or Asia at different times because it offered stability. Net lease is an asset type, which you have both those institutional money managers doing it now. And then you have private capital coming from around the globe. I can't tell you how many times we're getting people from the Middle East, from Europe that say, I want to have direct ownership.

21:04And net lease provides little to no management and the ability to get commercial real estate without big management, big fees and big promotes and buy it directly. So we see a lot of that capital flowing in here. There's things we could talk about of the fundamentals of Europe where companies wanted to own their real estate and interest rates were always low. We're seeing now that the sale leaseback market and the net lease market starting to evolve in Europe because of lack of really low rates like that they've had for so long. Now tenants are considering sale leaseback. So there's a good flow of new product in Europe as well.

21:41That's really great. I mean, it's interesting. thing, when we live in the U.S., you think all the problems that we have make the U.S. something less than it's been over the last hundred plus years. But the reality is the world still views this as a safe haven for capital. And the amount of capital that comes into the U.S., especially for CRE deals, I think is still very significant, maybe down some on the whole, given the current disruption. But generally speaking, it's really amazing to see how many people still want to own stuff in the U.S. for good reason, I think. So let's transition a little bit to the sale lease back.

22:11You mentioned that on the front end. We've talked a little bit about the 1031 stuff. And I think most people are fairly familiar with net lease having a pretty large 1031 presence. Maybe walk us through what you're seeing on the sale lease back. Is there some of these macro events that are driving that as a viable option today? Or have you seen a resurgence in that? Just give us a little color on that. Yeah, we're sale lease back experts. About 60 % of the transactions we do, like I was saying, is driven by that sale lease back market. And people don't realize it's really just a capital stack formation piece for someone buying a business or an occupier of a business has a real estate component.

22:48They have a business component where they're operating their business, but they have to operate it out of something. And as these groups go into finance a transaction, whether it's a$5 million business transaction or a billion dollar real estate transaction, owned and leased real estate usually make up a decent piece of the capital stack. So what we are seeing with all the institutional money coming in, we're seeing the bigger the transaction, almost the biggest premium you can get is with size. It's sort of being balanced out by capital and the rates and that and the people, mostly private equity, large family offices and stuff that are investing in this businesses are looking at all different types of capital up and down the capital stack.

23:32And sort of business lending, these debt funds have gotten and credit funds have gotten a little bit of bad rap lately, but the rates were higher than bank rates and sell leaseback. So that becomes very attractive. And the 100 % thing is a big factor as well, where you might be able to get a mortgage or traditional operating debt, and they're going to give you 50%, 60%, maybe 70 % financing today. 100 % means something without a balloon. So when you have like a billion dollar transaction, which we're working on a lot of these, and you could say 500 million in real estate that is basically, you know what your cost is going to look like for the next 20 years, you control the real estate for the next 80 years, and here's what it costs, comparative to a floating bank rate, or five-year money, or seven-year money.

24:25So the institutions viewing cost to capital, like sale leaseback is very attractive, both on the big deals and on the little deals. You talked about Dutch Brothers and Walgreens, like, you know, small developers that are building this stuff and selling, you know, people talk about the private, I always say the private market versus the 1031 market. Like a lot of people referred to the private market as 1031. That makes up 20 to 30 % of sort of the private transactions there. But like, I know we're going to talk about later, but bonus depreciation is another big reason. But alternative investing, even on the private side into net lease, the stock market's done great, but there's volatility.

25:09And when there's volatility in the market, we see people want hard assets. They want an investment they understand. That private market is very liquid and you're seeing it going into DST as we could talk about, going into individual ownership. So that supply and demand of people wanting to own hard assets is still very viable and the demand is still very, very strong and getting stronger. Yeah, I think it's a great point that you bring up. I mean, especially when there's uncertainty or disruption, it seems like that tangible real estate hard assets always comes back into favor. And it's great to hear that you're seeing that kind of boots on the ground perspective.

25:46You mentioned a little bit about the family office stuff. And I think, you know, I'm not someone that studies family offices. We have obviously clients that are family offices, et cetera. But it feels like just as someone that's not really connected to that, that there's been a proliferation of family offices focusing more on real estate. Is that something that you've seen as well? Absolutely. Both domestic and foreign. You said it as well, like, you know, hard assets and, you know, the United States being a good place to invest. So those factors are really growing the market strong for family offices.

26:21Like I spend a decent amount of time with our expansion in Europe. I was just in Madrid and capital is now flowing globally. Like interest rates were zero there and very low forever. And you could finance things very attractively. And people were happy buying at a five cap, financing at a 3 % and getting, you know, a five or maybe a 6 % yield. And in some asset classes, even lower, three or 4 % yield. These bigger families coming out of Sweden and Switzerland, the UK, that look at net lease and say, I can buy a seven cap and finance it at a six and engineer like a 6 % cash on cash or 7 % or 8%, depending where you're at on the credit market.

27:09There's real money. And these family offices control billions and billions of dollars of capital. And then you have your people here, your billionaire families, these sports, your people that own sports teams and other things. And then you factor in also the depreciation benefits that we can talk about. That sort of after tax for the family office, we say is a big driver. And again, these are transactions. Some of these family offices may buy$5 million properties, but others are buying$300,$400,$1 billion worth of property. There's so much demand and there's still so much capital globally looking for fixed return.

27:50That demand on the family office side is huge in that lease. You know, it's funny, and I think you'll agree with me on this, Evan. We've been in the business about the same amount of time, and I joke all the time on our weekly show that it used to be a$10 million transaction was like it meant something. Like you'd get in the business journal because that was a big deal, and then it was like$40 or$50 million, then it was$100 million, and now we have billion-dollar transactions left and right. Like it's the proliferation of these really large-scale deals for me. It's hard for me to get my mind wrapped around at some level.

28:21Same. I get amazed of the transaction sizes we've gotten the ability to work on. We've worked on billion-dollar ones. We've worked on two-and-a-half billion-dollar ones. It is amazing. I mean, I started my career, like I said, doing$500 to million-dollar transactions. I remember the first$10 million transaction, and now these numbers just get huge. And you're seeing it with a lot of different things, the aggregation of capital with the big money managers and public money. You're seeing it in private investing. But I do think real estate for the most part, and what I know more than anything, net lease, even though we've seen a ton of capital come in, we're still in the infancy stages of, you know, there are so many things that you can structure a sale lease back on.

29:08Like we talked a lot about retail today, but industrial, medical, even office, we've structured things on some really unique assets that you do net leases on from funeral homes to amusement parks, anything that is sort of freestanding, standing there can be structured into a net lease and part of the capital stack. And that's why I think there's unlimited growth. Yeah, I mean, it's very interesting. Some of the similarities from where we sit, like we track the securitized debt space. And so it's like you can see anything and like, oh, we can securitize that airplanes, real estate, whatever. And I think to your point, the net lease is very similar where some of these things that maybe traditionally wouldn't have fit in a box.

29:47Now they kind of fit into a box here. And it makes with the financial engineering and the structuring capabilities that we have today, it makes for a very interesting runway to your point. I mean, I think you'll see a lot, you'll see single tenant net lease deals expanding over the next 10 or 15 years into assets that people probably never would have thought they'd see before. I mean, just using some examples, some of the major reads have invested like done like sale leasebacks on some of the big hotels in Vegas, the Bellagio 2 billion, you know, transactions, which you wouldn't think, oh, that's not a net lease.

30:21Yeah, it is. I think Wrigley Field falls under one. The Empire State Building was a ground lease, like there's transactions that are huge and you could aggregate more and more. And what's interesting about the space and the data on net lease and sale leaseback, and we could talk, I know some of your questions are around default and credit, but like the default rate is very, very low still, even through the financial crisis, through COVID, these held up really well. And then the securitization and the ABS market and the CMBS market, they've been very low single digit default rates at all. So that's why this capital flows into this.

31:00And you also have like realty incomes, the biggest public, but all these other public net lease REITs, they have huge amount of assets with maybe half a dozen people in their property management division because they're not doing roofs and they're not doing utility and parking lot repairs of tenants. And so you have assets that are scalable and that are easy to manage. Yeah. I mean, those are definitely the selling points. And to your point, like that just helps create interest in people that, you know, I remember when I first started learning about net lease deals, it was like mailbox money is what people called it.

31:34And unfortunately, there's still some management. There's no such thing in real estate as mailbox money. Anyone that thinks that has never owned anything. But to your point, you don't need a huge management team compared to some of these other much more management intensive buildings. I agree. I hate that term. And anything comes with risk. And there's no such thing as investing without risk. And like we tell people, like, listen, you got to plan on sending someone to go see your asset every year. If you own an asset individually, hire someone, go there yourself, look at the tenant's financials, meet with your tenant, call your tenant, do that.

32:09But it's not day to day where you're walking around saying that brick is loose and you're getting calm. My toilet is broken, but it's just a different structure. But yeah, understanding your risk and net lease is also hugely important. Yeah. So this has been really great. I think I have two more questions for you and Glenn, you've been, you've been awesome. And I, you know, we do a weekly show that talks more on the macro and it's, it's great having these guest episodes where we have subject matter expertise that can explain to our audience in greater detail on some of these niche asset classes and investment thesis and things that we don't live in every day.

32:42So you've knocked it out of the park. But two questions. One, you talked a little bit earlier about the credit. You mentioned some folks, Whole Foods, Amazon, others. Is there a hierarchy? Like who at this point is at the top of the credit hierarchy? Like you see someone's name attached to it and you think this is going to drive some significant interest because people feel very secure about that named tenant. You know, the tech names still are now very big. You have data centers that are in net leases. So you have all those names. The Amazons, the Whole Foods are still very strong. Things associated with that are still in high demand, but the price points are bigger and bigger.

33:19You have in the smaller retail world, names like Chick-fil-A are still trading at very low cap rates. Raising Cane's, Starbucks, Chipotle, like people in the private market, a lot of people like things they understand. And household names, they can understand the business. Like they can go there and look and see there's a busy corner. We didn't talk, we talked a little bit about the underwriting criteria, but like real estate, you're still buying fundamental real estate. So location, location, location still matters. You know, if you have a tenant that was once great, you know, I always use the example of Kmart back in the day was at one time A rated and, um, and then they were junk bond rated and they're like, but you know, that real estate that sort of consumed me early on in my career of like, you know, when they went bankrupt, like, and they had problems, a lot of that got backfilled by Walmart, by Lowe's, by Home Depot.

34:17There's really like fungible uses for real estate and looking at the fundamentals are important. But like, I think everyday credits and things that people understand, even on the institutional level, things like, you know, names like Walmart, names like Costco are still in high demand. And the tech stuff, we don't do that much in the data center space. You know, I still have my sort of doubts of what a data center looks like in 20 years and what that building, you know, you have the Amazon credit or you have one of these big Cisco credits or whatever that may be signing that lease. I, as an expert, can tell what that building is going to be like 20 years from now.

35:01If you listen to, I think it's Elon Musk that these data centers are going to be in space and under the sea, what happens to the one that's on the ground that someone paid$150 million for today? I just don't know. Yeah, we've done a lot of discussing about this. I think the data centers themselves are actually more of a hybrid infrastructure real estate play, not a pure play real estate. Because if you listen to any of the folks that finance them, they're all happy to do the construction lending. But to your point, nobody wants to have the takeout for 20 years because they don't think they'll be functionally viable in 20 years.

35:34The reality is the technology will shift or to your point, they'll be in space or somewhere else. So it'll be, you know, the credit's good. Everyone wants to have exposure to Alphabet or Meta or, you know, these companies, but the building, the bricks and the sticks, I think has some functional obsolescence built into them. So we'll see how that goes. Last question. You mentioned depreciation. We had the one big, beautiful bill that passed. It kind of locked in 100 % bonus depreciation. Give us what that means for the net lease space and why that's a big deal. So it was transformative to me. And the JOBS Act was the first thing that brought in in 2017 when that passed.

36:08And then I don't do a lot of political things. I was very active in lobbying with the big, beautiful bill to get bonus depreciation back to 100%. And now that it's permanent in the tax code, it's been transformative for the net lease industry. I think bonus depreciable assets are an asset class in the net lease space that sits on its own. We talked about 1031. Bonus depreciation is more powerful than 1031 if you think about it. You're deferring higher taxable rate income. You can do it every single year, and it can be a huge wealth creator. So bonus assets, I feel like we've made the market. We are the bonus experts.

36:48We do between$4 and$10 billion a year of just net lease funds. So we're advising big institutional funds now that are passing through the bonus depreciation too. So you have also, you know, fund level investments you can make in that lease to capitalize on bonus. We do a lot in the automotive service and the car wash space, you know, gas stations that have more than 50 % fuel sales can be bonus depreciated. So tenants like 7-Eleven and Circle K that are signing long-term leases and have that reporting. An investor can buy that asset and minus the land, say the land is 10 to 20 percent. You know, you buy a five million dollar asset and you're getting four million dollars of loss in that year to offset against other income is such a powerful thing.

37:38I could speak for two hours on bonus depreciation because it's transformative for everybody in commercial real estate that has a portfolio that's paying tax. You have huge amounts of fully depreciated commercial real estate held by family offices, held by private individuals, and they're paying full freight taxes. If you can invest in bonus eligible assets and offset that income and then reinvest, it's hugely powerful. And also the power of what that did, I'm not political at all, but the ability for people to take risk, to do new development, to have that one-time loss, to take a risk of putting something in has changed the landscape as well.

38:22So the bonus depreciation market also has an institutional scope and a private scope. We cover both here at surmount very, very highly. And it's something we're watching. And I think the growth of that as more people learn about it and talk to their CPAs and look at what it can do to their portfolio, we're going to see that multiply by 10 and 20 % every year.

38:45Glen Kunofsky: Well, Lonnie and Glenn, this has been an excellent conversation today. Thank you both for so much back and forth. And again, Glenn, thank you so much for sharing your insights, your background, and really your passion for this industry. We can hear it in all of your answers. So we appreciate you joining us today. Before we let you leave though, we may have listeners who have more questions for you or want to learn more about what you and the team have built and are doing at Surmount. So how can they get in touch? Yeah, easy way to get in touch with me. It's gkanofsky at surmount.com. If you can't spell Kanofsky, it's pretty easy.

39:19Just go to Surmount and you'll find our website. but we're a full service real estate shop specializing in net lease. We're on Twitter, we're on LinkedIn, we're on Instagram, we're on TikTok. We try and put out good information about the market. We consider ourselves the market leader in this stuff. So reach out, get in touch with me or anyone at our company, it would be great.

39:43Glen Kunofsky: I love it. And thank you again, Glenn. This has been an excellent episode and we'll keep following along with the Surmount team and what you guys are up to. so with that we'll close this special guest podcast thank you Glenn for joining us today join us later this week as we look at what's happened during the week and how it may be impacting you if you have a question or just a comment send an email to podcast at trip.com until then visit trip.com for more info and subscribe to the tripwire podcast with your favorite provider thank you for listening and stay well all right