SINGLE TENANT NET LEASE SECTORS

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Understanding the Basics of Single-Tenant Net-Lease Investing

A Single-Tenant Triple-Net property (also known as “Net-Lease”, “STNL” or “NNN”) refers to a property which is 100 percent leased to one tenant with a lease structure in which the tenant is responsible for all property-related costs, leaving the landlord with minimal to zero responsibilities and steady reliable cash flow. NNN properties are a popular choice for individuals who wish to invest in real estate, but may not have the time or desire to actively manage a property. NNN Properties also usually have built-in rent escalations and renewal options for lease extensions which are beneficial to the landlord. These properties are in high demand and are perfect for absentee owners investing in other states, especially states that are called “Tax-Free” states having no state income tax. Due to these benefits, single-tenant net lease properties have become a favorite type of real estate investment for individual investors, private equity groups, institutional investors and real estate investment trusts (REITs). Institutional buyers and REITs typically invest only in investment-grade tenants and these assets are traditionally located in prime demographic locations. A private investor usually has less restrictive investment criteria and thus has more latitude and flexibility in choosing both a tenant and a location. Triple net single-tenant properties are available in all sectors of industry such as Banking, Medical, Pharmacy, Quick Service Restaurants, Retail Properties, Automotive, Office, and Industrial.

Just the Basics

STNL properties typically have either a double net lease (NN) or a triple net lease (NNN). With a Double Net lease (NN), the tenant pays rent, property taxes, and property insurance. The landlord is responsible for all exterior maintenance and associated CapEx, such as HVAC, roofs, windows, and landscaping. With a triple-net lease, the tenant agrees to pay rent, real estate taxes, property insurance, and all CapEx and common area maintenance expenses leaving the landlord with zero responsibilities. Whether a Double Net Lease (NN) or a Triple Net Lease (NNN), finding a good stable tenant is crucial for the investor. With the risk of having a vacant property on their hands, investors will often turn to a commercial real estate broker to help them find a strong tenant whether a credit-rated tenant or franchisee with solid underlying real estate. Realistically, most tenants will pay the rent consistently for STNL properties providing a stable income, therefore making them a sound investment for a property owner.

Due Diligence is Mandatory

Single-Tenant investments have considerations other than just the rent itself. Due diligence will mitigate other risks that may exist. Determining whether the property being considered is a Double Net Lease(NN) or a Triple Net Lease(NNN) lease property. Some can be incorrectly advertised as a NNN Lease property, but have the additional landlord responsibilities related to the property for items such as roof repair and replacement, snow and storm debris removal, HVAC, parking lot resurfacing, and more. This would, in essence, make it a Double Net Lease(NN) property. Remember, with a true Triple Net lease (NNN), the tenant is responsible for all of these costs and there are zero landlord responsibilities. It is imperative that a potential buyer review the lease carefully, inspect the property and evaluate the land as well as the improvement values. You should also know your tenant’s ability to pay, and their creditworthiness. In some property types, for instance, a franchisee will be financially backed by a corporation. These are some of the specific variables that must be taken into consideration as you think about investing in STNL properties.