Net Lease Investments Explained
What is a net-lease?
A Net Lease is an agreement between a tenant and a landlord where THE TENANT, not the Landlord, is responsible for paying rent plus some or all of the operating expenses of the building such as taxes, insurance premiums, repairs, and utilities. 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.
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.
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 ten 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 landowners who have previously never received any income or tax benefits from their property.
Who can invest in single-tenant, net-leased properties?
Anyone can invest in single-tenant leased properties. Other than large institutional investors and life insurance companies who invest in triple net leases because of the security they offer, individual investors who own single-family rentals who are just tired of having to deal with tenants or are afraid their equity will be wiped out in another market shift, are ideal candidates, especially since they can sell their rental and exchange that equity, tax free, into a net-leased property.
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 is less 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 rating 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 fewer risks related to investing in single-tenant, net-leased properties, as compared to more speculative real estate investments, 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 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 investment is guaranteed by the 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. That means you will derive a predetermined income from your investment, as long as the tenant is occupying the asset and current with the terms of their lease.