AEI’s All-Cash Approach
How AEI provides one-stop sale-leaseback financing for restaurant and retailers — and finds success without going into any debt.
Katie Foxworth Lee

Founded in 1970, AEI is the nation’s oldest sponsor of investment programs in commercial net lease real estate. The St. Paul, Minnesota-based company, which provides one-stop sale-leaseback commercial real estate financing for credit-worthy restaurants and retailers, has been steadily evolving and expanding its business strategy since inception. In 1972, AEI offered its first net lease property, with its first private fund following 3 years later. By 1984, AEI was doing what it does best: offering all-cash public funds. This all-cash conservatism has been the company’s cachet ever since — and its mantra moving forward as AEI and its stable of affiliated funds continue to grow.

Cash, in fact, is the name of the game at AEI. “We use 100 percent equity; we don’t use debt at all,” says George J. Rerat, vice president of acquisitions for AEI Fund Management, Inc., the employer and service provider for all AEI entities and funds.

Continuing this conservative investment strategy, AEI acquires properties under long term net leases where the tenant is responsible for property costs such as taxes, maintenance and insurance. Properties are typically held for 5 to 7 years for current income and sold with the objective of producing long term capital gains. Most transactions range from $1 million to $5 million on a per-property basis, with no more than $75 million in any one credit.

In 1992, AEI began offering tenant-in-common (TIC) interests in its net-leased properties to real estate owners completing IRS §1031 tax-deferred exchanges. Since 1992, Rerat says, AEI has completed more than 650 successful property exchanges. And that’s not just by good luck: AEI looks at each tenant deliberately and seriously, weighing the economics of the situation and the amount of risk involved. Name brand national and regional companies are preferred.

“We first look at the tenant,” Rerat says. “Do they have a box that presents strong and proven economics? Do they have a strong balance sheet and cash flow that will take them through an economic downturn? Do they have a concept that is growing on both the top revenue line and the bottom net line?”

Some of AEI’s retail/restaurant clients today include Applebee’s, Jared the Galleria of Jewelry, Carino’s Italian, T.G.I. Friday’s, Arby’s, Eckerd Drugs, Advance Auto, Tractor Supply, Carmax and Best Buy. In fall 2006, AEI closed a $28 million Applebee’s transaction and, more recently, AEI completed a four-store Advance Auto deal.

After picking the right tenant, Rerat says, it all boils down to real estate. “Is it in a growing middle income demographic?” he says. “Does it have good access and visibility?”

If the tenant is good, and the location is good — then what? Lastly, Rerat says, AEI looks at the lease itself. “Is it fair too both the tenant and the landlord? What are the landlord obligations?”

Above all, AEI considers the consequences of transactions on its investors, many of whom are high net-worth individuals who want to reap the rewards of capital gains but not necessarily get caught up in the hands-on demands of owning commercial real estate. Basically, AEI asks itself the following question when considering a new acquisition: “Is this the type of tenant, real estate and lease that will offer our investors safety of principle, good current income and the potential for long term property appreciation?”

AEI works in 32 states on an all-cash basis. Since 1975, it has organized, offered and managed 32 public and private net lease commercial real estate funds. More than 17,800 investors nationwide have committed capital to the AEI family of funds, which include AEI Securities, AEI Exchange Services, AEI Capital Corporation, etc. And that doesn’t even scratch the surface.

George Rerat

“We’ve got too many companies,” laughs Rerat. “We have public funds that are registered with the SEC, and the private funds that are not.”

AEI Fund Management has sponsored 16 private offerings, including the $100 million AEI Accredited Investment Fund VI, LP. The company has also sponsored 16 public offerings, including its most recent $100 million public fund, AEI Income & Growth Fund 26, LLC.

“We have 14 funds in operation today,” Rerat says. “And we manage well over 100 TIC properties, giving AEI more than $500 million of net leased property that is owned by its funds and TIC investors. All of it is debt-free.”

Conducting business debt-free in today’s market is not an easy feat to pull off. “The triple-let lease market today is very competitive,” Rerat says. “I don’t think it’s getting any easier either. Private companies like us are competing for similar assets with each other and with public companies. But I do think an advantage we have over our competition is we are able to move more quickly; we typically close a deal in 30 days or less.”

In the future, AEI doesn’t plan to stray from its successful course. Its goals over the next 5 years, according to Rerat, are “continuing to purchase property at a rate of $85 million to $120 million a year and dispose of property at a rate of $45 million to $60 million per year. We’re not changing our focus — we’re still looking for freestanding triple-net properties.”

And, if finding the right tenant takes AEI beyond its 32-state work zone, so be it. “We go where our tenants take us,” Rerat says.


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