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Harvard to fund "triple-net lease" venture: source

A students sits on the steps of Widener Library at Harvard University in Cambridge
A students sits on the steps of Widener Library at Harvard University in Cambridge

By Ilaina Jonas

(Reuters) - Harvard University's endowment is the main investor in a venture that could buy more than $1 billion of triple-net leased property, a form of investment that offers higher yields and relative stability at a time of financial market volatility, a source familiar with the deal said.

So-called triple-net leased property requires the tenant to assume all risks, such as higher property taxes, damage and maintenance.

Jones Lang LaSalle Inc , which was hired to raise the equity for the investment vehicle, USRA Net Lease Capital Corp, has secured $360 million, 20 percent more than the target, said Tom Beneville, international director for Jones Lang LaSalle, who declined to confirm Harvard's involvement.

Investor demand for the triple-net leased, single-tenant property underscores the hunger for yield at a time when interest rates are at historic lows.

"Today investors are looking for two things that are hard to find: yield and some measure and safety and security," Beneville said.

For the investor, owning a single-tenant, net-leased property is akin to a bond issued by the tenant, with the added benefit of the value of the underlying property.

"These transactions usually throw off a cash flow significantly greater than a comparable company bond," said Richard Ader, chairman of U.S. Realty Advisors, which will manage the venture.

"So you have long-term stability with higher cash flow than the bond, and it's secured, where most bonds are just full-faith and credit of the issuing company. Here you have the collateral of the real estate as well," said Ader, who also declined to confirm Harvard's investment.

Harvard, whose endowment was valued at $27.68 billion at the end of June, declined to comment.

Investors are likely to see a yield of about 6.5 percent to 8 percent, Ader said, higher than the 1.72 percent rate on the 10-year U.S. Treasury bond and the average 2.16 percent dividend yield on the S&P 500 stock index.

Such a yield also would be higher than that offered by the average U.S. real estate investment trust (REIT). As of September 21, yields on property-owning REITs were running at about 4.04 percent, according to SNL Financial's Equity REIT index.

Rents on triple-net leases are typically lower than under a conventional lease because the tenant incurs all the risk and, unlike a bond, real estate usually cannot be sold quickly.

The venture would probably use debt financing of about 65 percent to 75 percent, boosting the $360 million to about $1 billion to $1.2 billion of purchasing power, Ader said.

He said he expected the venture to buy mostly warehouse and distribution centers, along with some retail and office properties.

The venture is likely to last seven to 10 years, with acquisitions within the next two to three years, Ader said.

(Editing by Ted Kerr)

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