SINGLE-TENANT NET LEASE – EXPLANATION OF A NET LEASE
What Is A Net Lease (NNN)?
What is a Net Lease and what does NNN mean? The simple answer is that the tenant is responsible for the rent and the ongoing expenses of the property. There are three basic types of net leases, defined by the range of expenditures covered by the tenant. The “N” is an abbreviation for the word Net.
The NNN includes Property Tax, Maintenance (e.g. on parking lot lighting, landscaping, roof and air conditioning unit among other items), and Property Insurance (Liability Insurance for the exterior areas and Property Insurance for the building).
You can use the acronym TIM for the progression from Net (Real Estate Taxes), Net Net ( Taxes and Insurance), to Net Net Net (Taxes, Insurance and Maintenance).
Below is a chart that explains the spectrum from Single Net to Triple Net property leases:
- Single Net: (N or Net) The tenant pays Rent plus the Property Tax.
- Double Net: (NN or Net, Net) The tenant pays Rent, Property Taxes plus Property Insurance and Property Liability Insurance.
- Triple Net: (NNN or Net, Net, Net) The tenant pays Rent, Property Taxes, Property & Liability Insurance, and Maintenance costs.
What Is The Difference Between A Net And STNL Lease?
Net lease properties can have multiple tenants, such as a shopping center, low rise office building or multi-tenant industrial property. The difference between these multi-tenant properties and Single-Tenant Net-Lease properties is the landlord (property owner) has to do all the work with more than one tenant.
For example, in a shopping center, the property owner has to pay the taxes, obtain and pay for insurance, and contract vendors for parking lot cleaning, striping, sweeping and snow plowing, along with other building maintenance responsibilities. The property owner has to pay for all the expenses and then calculate the “pro rata,” or proportionate share for each tenant, and bill them to collect the reimbursements.
With a Single Tenant Net Lease (STNL), the tenant does all the work, pays all the bills and also sends the property owner a rent check because they are the sole occupant of the building and obligated by the lease to perform these responsibilities.
Are STNLs A Good Investment?
NNN rentals are becoming increasingly attractive to investors for many reasons. How about we explore some selling points of Single-Tenant NNN commercial real estate investments?
STNLs Are Passive Income Investments
Single-tenant net lease rentals are one of the fastest-growing sectors of the entire realty market. Investors want the benefits of a hassle-free “armchair” investment, and tenants like the flexibility and financial benefits created by entering into these agreements.
STNL investments are attractive to investors because, as stated above, these charters are structured so that the investment is less management-intensive, provides a more stable income, and has fewer direct costs to the property owner. NNN investments are “Passive” investments and investors receive their distributions “Mailbox Money” without the usual hassles of residential rentals.
STNLs Have Long Term Commitments
Most STNL agreements typically have lasting contracts that provide for the tenant’s use over an extended period of time. The rent terms are a minimum of 5 years but the average is 10 to 15 years with some rent agreements lasting for 25 to 50 years. The renting party will also negotiate “options” to extend the rent even further.
For example, we have a Walgreens lease that was executed (signed into an agreement) in 1955 (before zip codes, copy machines, and DocuSign). They extended the rent in 2010 for another 50 years.
What Is The NNN Lease Market And What Should You Know About It Today?
The STNL market is constantly evolving and expanding. Here are the latest trends to note in the market.
NNN Rentals Attracting More Investments Than Multi-Tenant Rentals
Multi-tenant structures like shopping malls are becoming less fanciful for investors by the day. A sizable chunk of the businesses commonly transacted in multi-tenant estates is dying due to the explosion of eCommerce and buyers preferring easy online purchases. This has forced the property market to adapt itself to exclusive businesses (that can’t be readily replaced by eCommerce), like medical clinics and facilities, event centers, fitness centers and gyms, and gas stations.
You will agree that these businesses prefer having their offices exclusively devoted to them, not shared with swathes of other tenants. NNN rentals best appeal to this category of firms.
This has triggered a substantial hike in the interest in NNN lease properties as investors begin to favor the consistency, stability and flexibility they bring. One of the biggest attractions of these single-tenant rentals for investors, as said, is that it relieves the investor of active, day-to-day landlord duties.
On the other hand, as tenants, larger brands now prefer dedicated hubs, like STNL rentals, where they can significantly invest in their objectives in the long run. This enables them to make enduring investments with 10 to 15 years in mind.
Decreasing Cap Rates On NNN Rentals
Today, there are more Single-Tenant Net Lease buyers because NNN properties are getting increasingly listed. Consequently, there has been an unprecedented decrease in cap rates which increases prices on these types of properties. These hikes were most significant in mid-2020 as investors moved into quality and stable investments.
This has consolidated the resilience of STNL properties as viable investment vehicles by increasing the reward potential while notably slashing the risk potential.
The increased volume of NNN listings is now giving investors an important element of choice and variety. The extensive spectrum of NNN possibilities for the investor is making the estates cheaper to acquire.
Location, Location, Location
Depending on the business category, a tenant selects a specific location to operate because of a variety of factors that they require to be profitable. For example, a manufacturing plant may choose a location for inexpensive electricity and a well-trained workforce. A software company might choose San Francisco, San Jose, Bangalore or Austin. Similarly, a casino resort hotel might choose Las Vegas or Macau.
For instance, Liberty Real Estate Fund is most interested in high traffic, Main & Main retail hubs, so we acquire occupied, freestanding single-tenant buildings on major streets with unobstructed visibility and easy access. These properties generate significant demand from tenants because the visibility, traffic and prominent signage help consolidate their brands in the marketplace. The locations are surrounded by the demographics (population densities and income groups) that are most likely to shop at or utilize those renters’ services.
Since the occupant spends a significant amount of capital, advertising power and other efforts to enhance these rentals, they want to know that they can control them for long periods of time. If you are investing in these types of properties, they are also easy to re-purposed to accommodate a multitude of users and uses.
You Must Also Consider Financial Strength Or Credit
“A triple-net lease is really a corporate bond wrapped in real estate.” As described by Jonathan Hipp, Managing Director of the Avison Young US Net Lease Group and co-author of The Little Book of Triple Net Lease Investing, he goes on to say, “There are many places to invest your capital and net leases are very attractive when looking at other fixed-income alternatives.”
With an NNN rental, an investor is typically acquiring a property with a corporate lease (backed by a Brand Name company with income sources spread out over a number of locations). The creditworthiness of a tenant is why an STNL investment has many of the characteristics of buying a bond. The Investment Grade (IG) ratings from Moody’s, Standard & Poor and Fitch are important factors to consider along with the location aspects and condition of the property.
Related Article: Investment Grade Credit Ratings
A Single-Tenant Net-Lease Is Like A Bond Wrapped In Property Investment
Sophisticated investors seek to invest in “Investment Grade” property assets. These are tenants with credit ratings at least BBB- or higher by Fitch and Standard & Poor, or Baa3 or higher by Moody’s.
Many STNL properties are rented to publicly traded companies such as CVS, Walgreens, Aldi, 7-11, Carrefour, Dollar General, McDonald’s, Starbucks, Walmart, Whole Foods (Amazon), Metro, and Ikea. In this case, it is easy to pull up investment research from reputable online stock analysis sources. NNN leases backed by Investment Grade tenants are also sometimes called a Credit Tenant Lease or CTL.
NNN properties usually always provide higher returns than bonds because real estate is illiquid. But when discussing risk-adjusted returns, NNN lease property investments surpass bond investments.
Many NNN properties are rented by franchisees who might operate one to several hundred, or even thousands, of locations. These franchisees are usually sophisticated business operators or doctors and dentists with robust financial standing.
The franchisee gets the benefit of the Brand reputation and the Systems to operate the business. The property owner gets the security that comes with the fine reputation of the brand. In the case of medical and dental properties, the guarantor might be a large hospital system or Dental Services Organization which is backed by significant private equity firms or hedge funds. STNL assets are located at the intersection of Main Street and Wall Street.
Credit Equals Leverage And Assures Cash Flow
The credit of the tenant is important because it assures you as an investor that you will receive the agreed-upon rent. Additionally, because the rent is guaranteed by the strength of the financial creditworthiness of the tenant, you can use leverage (a mortgage or third party financing) to maximize your investment.
For example, let’s assume you are choosing between two of McDonald’s net-rented properties. One has a Corporate Guarantee from McDonald’s Corporation and the other has the personal guarantee of a McDonald’s franchisee.
Regardless of the facts of the location and the store sales, most banks or financial institutions will loan you more money and at better terms on the Corporate Guarantee because the charter is fully backed by a fantastic worth of $165 billion (plus or minus).
The bank and you as the investor have a higher likelihood of getting paid by McDonald’s Corporation than the franchisee who might be the best operator in the chain and a very nice person.
This is the big difference between investing in single-family home rentals, apartment buildings, self-storage, or mobile home parks. Those might be great investment asset classes but you don’t get anywhere near the assurance of getting paid regularly as you do with an NNN lease to a quality company.
Brand Name Tenants Equal Brandable Properties
Brand Name is also a major factor in the pricing and likelihood of the individual (or business) occupying and paying rent throughout the term of the lease. A great brand name paying the rent and maintaining your building will make your property more valuable because of the advertising and marketing they do to make their brand stand out; it is basically free advertising for the investor’s property.
For example, with McDonald’s, the home of the Big Mac, you know that when you go into any of their restaurants the experience is going to be uniformly consistent because of the systems they have put in place.
Most importantly, McDonald’s spends lots of money and time evaluating the location. Where McDonald’s goes, other businesses follow. The video below from the feature film The Founder, based on Ray Kroc’s life, is enlightening:
The building serves as a billboard blasting out the occupant’s name, design style, and even ethos.
One more example is Starbucks. This is a notable destination when thinking about going “out” for coffee. Undoubtedly, Starbucks immediately is first and foremost in the public’s perception of the coffee niche. You can make coffee much cheaper at home but you go for the consistent “experience” the brand gives you.
What Tax Advantages Come With NNN Leases?
NNN Lease investment properties enjoy excellent tax treatment. Tax benefits include the ability to deduct most operating and property expenses before taxable income.
In addition, you get to deduct mortgage interest payments for the property. Another deduction available to property investments is depreciation and, in many situations, special types like accelerated depreciation and bonus depreciation can legally reduce taxable income. If the property is held for more than one year, it qualifies for Capital Gains treatment, which is usually taxed at a lower rate.
A unique tax benefit that is an excellent strategy is the 1031 Exchange. Many STNL investors are individuals who own other types of investment properties like multifamily, shopping centers, office buildings, and mobile home parks struggling with the exertion of active landlord duties.
When they have had enough complaints from occupants (spanning toilets and termites issues) or are bored of chasing tenants for rent, they end up jumping into NNN Lease properties for minimal management hassles.
Risk Factors For STNL Investments
The biggest risk with any STNL property is that you as the investor are dependent on one tenant for all the income. NNN lease properties are either 100% occupied, paying rent, or 100% vacant, costing you money.
If the occupant vacates at the end of their term, you have a building or property that needs to be re-leased or sold. The value of the building was based on the income stream, so it will most likely be worth less than the original investment, especially in your desperateness to sell it soonest to start earning again.
However, if you owned a well-diversified basket (both geographically and industry) of STNL properties it would help mitigate this risk.
A skilled operator may even release the vacant space well above what the previous tenant was paying in rent, and receive a positive “lease spread.” Thus, increasing the value of the property and future income stream.
On the other hand, investing in Corporate Bonds also comes with its risks. If the company stops paying, all you have is a worthless piece of paper. However, you are more protected with the NNN Lease. For the latter, if a tenant stops paying rent, you still get property expenses.
With a vacant building, you as the investor have a real responsibility (liability) to pay property taxes, building maintenance, property insurance, and to secure the property from vandalism and theft. Re-leasing and re-tenanting the building will probably require capital expenditures in the form of commissions, architectural plans, building permits and tenant improvements.
This is why you should educate yourself on STNL investments. Join our mailing list for the new book by Michael Flight, “Nothing But Net – Millionaire Secrets For Passive Cash Flow.”
Liberty Real Estate Fund Specializes In Net-Lease Investments
Liberty Real Estate Fund is a specialized investment fund that acquires STNL properties. LibertyFund is a real estate fund structured for investors to achieve geographic diversification, industry diversification, tenant credit strength, and it is comprised of hard assets with intrinsic value.
Our portfolio of NNN Lease properties is constructed with brand-name Essential Businesses, operating in high growth markets throughout the United States. NNN assets have durable contractual rents backed by excellent brand-name companies.
LibertyFund was founded by an experienced property development team who believes that Security Tokens are superior to traditional investments. This is because investors will benefit from liquidity, cost efficiency, and transparency provided by real estate on the blockchain.
We are pioneering a revolutionary means of obtaining the cash flow and stability of high quality commercial real estate combined with the liquidity and security of Blockchain technology.
But you don’t have to take our word for it, learn more about the world’s first single tenant net lease security token and see how you can get in on the action today!
Liberty Fund presents the world’s first single tenant net lease security token. Sign up here to be in the know of our next exclusive webinar giving you the insights into how to invest smarter with better returns.
Michael Flight was named the Godfather of Blockchain Real Estate by Forbes Crypto. Michael achieved that distinction by co-founding Liberty Real Estate Fund, the World’s First Net Lease Security Token Fund, creating the Blockchain Real Estate Summit. More recently co-founding Invest On Main (IOM.ai) the Real Estate & Alternative Asset marketplace of the future and AcceleratedLaw a faster, cheaper way to create and tokenize securities offerings!
Michael is a real estate entrepreneur and real estate tokenization pioneer who is an expert in retail real estate investment, redevelopment and real estate on the blockchain. He started his commercial real estate career in 1985, and then co-founded Concordia Realty Corporation in 1990, which continues to partner with some of the world’s most well-known banks, insurance companies, hedge funds and institutional investors in many successful investments.
Liberty Real Estate Fund LLC is The World’s First Single-Tenant Net-Lease Security Token FundTM, joining 30 plus years of institutional real estate investment experience with blockchain technology to deliver very stable, diversified, tax efficient returns combined with liquidity, security and transparency.
Liberty is a real estate investment fund that acquires Single-Tenant Net-Leased (NNN) essential business retail, auto service and medical properties in the United States. It is designed for investors to achieve: Geographic Diversification; Industry Diversification; Tenant Credit Strength and is built with hard assets that have intrinsic value. Our portfolio of Net Lease properties is constructed with brand name Essential Businesses operating in high growth markets throughout the United States. These Net Lease assets have long term contractual rents backed by excellent brand name, well capitalized companies.
Liberty is focused on investing in high quality, well located Single-Tenant Net-Leased (NNN) properties in targeted high growth, low tax areas of the United States. The portfolio has been specifically designed to provide stable, recession resistant income combined with inflation protected wealth preservation and equity growth.
Liberty was founded by an experienced real estate team who believes that Security Tokens are superior to traditional investment methods because investors will benefit from the liquidity, cost efficiency and transparency provided by the blockchain.
For more information on LibertyFund contact us here:
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