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Many investors are looking for a safe place to put their money with the wild fluctuations in the financial market. Stable, predictable investment vehicles are increasingly hard to find, but smart investors do have choices. One of the better choices is to invest in single-tenant, net-leased properties, which many investors also call a corporate bond combined with real estate investments that still make sense today.
Here's what you need to know about single-tenant, net-leased properties:
What is a single-tenant, net-leased investment?
A single-tenant, net-leased investment is typically a freestanding office, retail, or industrial building that is leased and occupied by one user or one company. Typically the tenant has committed to a long-term lease - usually longer than 10 years, and as long as 25 years with increasing rent over the lease term.
What is a net lease?
There are different types of leases for commercial property in the U.S. The two most common leases are full-service leases and net leases.
A full-service lease means that the tenant is paying one base amount to the landlord/owner to occupy the space and the owner pays all the expenses related to the building including insurance and property taxes. With a full-service lease, the landlord/owner also is responsible for all maintenance related to the building. For example, if a thunderstorm damages the roof, the landlord/owner must pay for the repairs.
In comparison, a tenant with a net lease is responsible for paying rent plus some or all of the operating expenses of the building such as taxes, insurance premiums, repairs, and utilities. Depending on how the leases are structured, they can be net-net leases or triple-net-leases. Specifically, in the case of a triple net lease, also known as NNN leases, the tenant agrees to pay all of the building's operating expenses, real estate taxes and insurance.
How are single-tenant, net-leased investments different from multi-tenant buildings? Multi-tenant buildings have more than one tenant, and as a result, owners and landlords must juggle multiple leases that begin and end at different times. These leases are rarely longer than seven years. That means that the building's financial performance is vulnerable to the ups and downs of the market.
Many net-lease investors have previously owned other types of real estate but are looking for an investment that requires less maintenance and supervision. For example, many apartment investors end up selling their high-maintenance properties and then reinvesting the sale proceeds in single-tenant, net-leased retail properties, as do many land owners who have previously never received any income or tax benefits from their property.
Who can invest in single-tenant, net-leased properties?
Net leased properties are appealing to a wide variety of buyers, from high net worth individuals to partnerships to large institutional investors like real estate investment trusts, life insurance companies and pension funds. Net leased properties also are very attractive to investors who need to do 1031 tax-deferred exchanges, or 1031 exchanges for short.
What are the benefits of investing in single-tenant, net-leased properties?
Many people consider single-tenant, net-leased properties as bond-like investments because of their stable, predictable returns. Because tenants commit to long-term leases, there's very little re-leasing risk. Moreover, single-tenant, net-leased investments can be tailored to an investor's risk-reward expectations by choosing tenants with different credit profiles. For example, some tenants are rated by national credit ratings agencies while other tenants have only their previous financial performance to recommend them.
What are the risks related to investing in single-tenant, net-leased properties?
While there are very few risks related to investing in single-tenant, net-leased properties, tenants with non-investment grade credit profiles offer higher levels of risk. But that risk typically provides higher returns as well. And investors always need to think about the "re-leaseability" of a property if the net-tenant were to vacate the space.
How are single-tenant, net-leased assets valued?
Unlike traditional real estate investments whose valued is determined exclusively by the real estate itself, a single-tenant, net-leased property's value is determined by a combination of factors including the tenant's credit, the length of the lease and rental escalations over the term, and, last but not least, the real estate. In markets where the real estate experiences wide valuation swings, a single-tenant, net-leased property will maintain its value because of its bond-like, long-term lease and the credit tenant guaranty for the lease.
When is the best time to invest in a single-tenant, net-lease property?
Net-leased properties are like all-weather tires. They are good investments in both good and bad economic times and in hot and cold real estate markets. Here's why: a single-tenant net lease is guaranteed by a long-term lease at pre-set rental rates. As an owner, you know exactly who will be a tenant in your building, how long that tenant will be there and exactly how much rent they will pay you. That means you will derive a steady income from your investment, regardless of how the economy or real estate market is performing.
Net-lease properties are in high demand, as a 1031 solution. Calkain Companies Net-Lease Sales offers single-tenant and triple-net investment properties for sale. Our NNN experts can help a buyer or broker find and purchase Net-leased and single-tenant investments nationwide. Net leases are great 1031 options. Net-leases with credit tenants are offered as sale-leasebacks, single ownership and Tenancy-In-Common (TIC) transactions. Calkain's Net-lease team can help you buy or sell a variety of Net-Leases, or an even wider variety of Tenants-In-Common (TIC) properties.. Most triple net lease agreements are long-term arrangements that last from 10 to 25 years A triple net lease property may be a suitable replacement property for a 1031 exchange. If you're looking to defer the capital gains tax from the recent sale of a property, a 1031 exchange is an excellent alternative. In addition, a triple net lease property may be a great tool for estate planning. A triple net lease is only one of many commercial leasing options. In a gross lease, the lessee pays rent while the landlord takes care of everything else. Most people who rent their homes are familiar with the terms of a gross lease, as this type of lease is commonly used for residential properties. In a double net lease, the landlord assumes some of the costs of property upkeep. In a double net lease, landlords commonly cover parking, heating and cooling systems, and the structural integrity of the building.
The triple net lease is sometimes called a true net lease, because the landlord usually has no responsibilities related to building upkeep. For this reason, many commercial landlords favor triple net leasing options. The building can generate a high level of income while the tenant keeps it in good condition, generally making improvements as well. The tenant has many of the advantages of ownership, including control over the property, without the substantial capital investment that a new acquisition represents.
A triple net lease can be risky for a landlord. Some tenants may not be able to pay fees, or may allow the building to fall into disrepair. In extreme cases, a tenant may deliberately damage a building to collect insurance money. For this reason, some triple net leases include a reserve fund. The tenant makes regular payments into the reserve fund, which can be used to cover essential repairs in the event of emergency.
A triple net lease is individualized to the tenant and lessor. The terms of the contract may contain restrictions and stipulations to protect both parties. In some instances, for example, the terms of the lease may include a cap on total property taxes to be paid by the tenant. If the property taxes rise above a certain amount, the landlord will be responsible for covering the remainder.
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