‘Net Lease’ Properties – The Golden Goose of Commercial Real Estate?
WHY SO GOLDEN?
STNL and NNN properties could be just the golden goose of commercial real estate you have been looking for – providing sound investments with little to no need for involvement in property management or day to day due diligence but accompanied by strong predictable annual returns. Single Tenant Net Lease (STNL) or Single Tenant Triple Net Lease (NNN) properties are often a great way to start investing in commercial real estate, diversify your existing portfolio or invest without the need to commit to managing the property. These investments are 100% leased to a single tenant wherein that tenant is responsible for most or all of the property related expenses and capital improvements. These types of properties include national retail tenants, medical offices, industrial distribution centers and franchise businesses.
WHAT ARE THEY?
There are three types of these geese to consider. There are Single Tenant Net Lease options, Single Tenant Double Net Lease options and Single Tenant Triple Net Lease options. “Triple-Net” refers to the tenant’s responsibility to cover all property expenses – where the ‘Nets’ refer to three things: property taxes, insurance and operating expenses. In a Net-Lease agreement the tenant is usually responsible for property taxes but not insurance or operating expenses, while double-net could refer to a combination of any two expenses. In NNN scenarios the owner of the real estate has no responsibility for the day to day management or expenses with relation to the subject property.
A GOLDEN GOOSE IS TOO EXPENSIVE FOR ME…
Not at all! Surprisingly these Golden Geese are everywhere. ‘Net-Lease’ properties asking prices are quoted based on the calculated annual cap rate. Cap rates are calculated by dividing the annual net operating income by the purchase price of the subject building, estimating the return on investment you can expect as the borrower. This means cost to acquire ‘Net-Lease’ properties range wildly depending on locale, type of business and volume. Average acquisition costs range from $300,000 to $5,000,000 which means with $300,000 in equity and good credit standing a borrower may be able to acquire an income producing ‘Net-Lease’ property without the need for additional working capital.
WHERE DO I FIND THIS ELUSIVE GOLDEN GOOSE?
Selecting the right net-lease property is where most of an investor’s research, effort and involvement are crucial. Net-Lease properties often have tenants with long-term leases, 10–25 years with multiple extension options and annual rent increases built into the term of the lease agreement. However, due to the nature of these long-term leases and the desire of the investor to enter into a secure term with the tenant, considering location, tenant credit and demographics are most important. Since you are working with a single tenant it’s important to choose a good egg. Financial performance over time is largely attributed to the tenant’s ability to pay rent, maintenance, building and operating expenses over the lease term.
DOES THIS GOOSE HAVE ANY BAD EGGS?
While Net Lease properties provide somewhat of a hands-off long term investment with predictable annual cash flow, there can be some potential cracks in your golden egg. These cracks or risks include:
Short Term Lease – Selecting a net lease property where the tenant’s lease is close to expiring could create a scenario where, if the tenant does not renew, you have to find a new long term tenant. This could present challenges if the building was a custom design in-line with a national retailer’s branding.
Higher Than Usual Market Rates – Some national retail tenants have strict requirements as to the location of their business in relation to other retailers. For example, Walgreens requires most of their assets to be positioned at the corner of an intersection. To acquire said locale, they may be willing to pay over fair market value but if they decide to relocate or change locations, you may be hard pressed to find someone willing to rent the space at the same higher rate.
Design – as touched upon above, depending on the tenant at the subject location the building may have a custom design and function. If the tenant leaves, goes bankrupt or does not renew their lease you may have to completely overhaul the property to attract new tenants, a cost you should consider longer term.
HOW DO I CHOOSE AND FINANCE JUST THE RIGHT GOOSE?
Unlike commercial real estate loans that are backed by only the value assessment of the subject property, ‘Net-Lease’ financing also takes into consideration the credit rating of the tenant in relation to the remaining term of the lease. This makes it easier to acquire one of these properties as traditional lenders are often more flexible with the terms and amount of the loan in relation to a borrower’s personal equity and credit history.
NEED HELP LOOKING FOR THE RIGHT ACQUISITION AND RIGHT TYPE OF FINANCING?
Progress Capital Advisors has financed the acquisition of over $500 Million worth of ‘Net-Lease’ properties throughout the United States. We assist and advise clients on locations, types of business and demographics regarding net lease properties and ultimately secure financing on assets with long-term lease potential and healthy estimates on annual return on investments in relation to risk.