What You Need to Know to Invest in Single-tenant, Net-leased

Version 3

    *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.