Why Single Tenant Net Lease Investments?
A single-tenant net lease allows investors to generate returns by owning and leasing a property which is occupied by a single tenant. Single-tenant leases tend towards longer terms and many large national chains like Subway, Burger King and Starbucks pursue net lease arrangements for their retail storefronts.
Single tenant net leases are among the safest asset classes out there – Let’s take a look at some of the reasons why single tenant net lease investments are sought after by many high net worth and accredited investors as well as some of the risks presented by this asset class.
As an asset class, single-tenant net lease (STNL) investments offer passive and stable income. New leases typically last 10 years at a minimum and often exceed 25-year terms, which allows STNL properties to provide long-term, stable cash flow.
Rental rates for a subject property are defined in the lease agreement, and tenants are responsible for most or all operating expenses- these two factors in concert underpin their historical stability and predictability. In addition, the lengthy lease terms for STNL properties reduce tenant turnover expenses and lease market fluctuations:
- Set it and forget it:
Most single-tenant net leases are structured in a manner that places most property responsibilities on the tenant, rather than the landlord. Single tenant net lease tenants are typically responsible for the operating expenses of a given property, and they often deal with these bills directly, rather than the landlord acting as an intermediary. For example, instead of paying the property tax bill as a landlord, under a STNL, the tenant will pay that bill directly, which reduces the administrative duties of investor-owners. The fact that tenants have a long-term interest in the maintenance and upkeep of a property also reduces “wear and tear” on the building compared to traditional short-term tenants.
- Top-tier tenants.
STNL tenants often include investment-grade, publicly traded companies like Walgreens or Safeway. These companies publish their financial data and undergo review by third-party credit rating agencies. Prior to signing a long-term lease, landlords have the ability to mine this data to determine the stability and creditworthiness of a prospective tenant. Strong credit ratings correlate highly with increased security in rental payments.
- Potential for advantageous financing terms and structures:
In many sectors of the real estate market, loans are taken out against the value of the subject property. With STNL your tenant’s credit rating is as or more important than the value of the subject property. This is especially true of bondable leases with a long remaining lease term. This paradigm shift in how lenders look at creditworthiness for STNL tenants opens the door for other financing options that are not available to other RE investors, like credit tenant lease or CTL financing.
All investments have some measure of risk. While STNL retail investments offer many benefits, like stable cash flow over a long term, there are some risks involved with an investment in this asset class. These include:
When you own a STNL property, your investment is either 100% occupied, or 100% vacant. Since you only have a single tenant, if that tenant hits a rough patch or needs to relocate, your incoming rent drops to zero, and you will once again be responsible for upkeep costs like taxes, maintenance, and insurance.
- Location Issues:
While single tenant net lease retail properties are different in many ways from a traditional RE investment, they are still bound by the laws of the real estate market- namely the critical importance of the location of your property. For the most part, if the region or neighborhood in which a property is located declines, property values follow. If a neighborhood is not economically vibrant, it will be harder (but not impossible!) to find good tenants and the value of the building itself may decline.
These are just some of the potential risks that you may face with a STNL investment. Before you decide to pull the trigger on any investment, it is important that you do your due diligence like market research, paying attention to demographic trends, and other data points you need to analyze before investing. We created Leybridge to help our clients identify, address, and manage the risks involved with a STNL investment.
Leybridge provided access to high quality real estate investments for 20-years under absolute-net terms and provides property owners with the following:
- Zero Management
- Zero Capital Expenditure After Acquisition
- Direct Title to Property
- No Partners – Unlike a Securitized Investment
- Control of Exit Timing
- Control of Use of Debt
- Superior Capital Preservation
- 5.75% – 6.50% Annual Cash-on-Cash Yield on Equity