101 Net-leased Properties
December 6th, 2010
101 Net-leased Properties
What You Need to Know to Invest in Singletenant Netleased Properties
Many investors are looking for a safe place to put their money with the wild fluctuations in the financial market. Stable predictable investment vehicles are increasingly hard to find but smart investors do have choices. One of the better choices is to invest in singletenant netleased properties which many investors also call a corporate bond combined with real estate investments that still make sense today.
Here’s what you need to know about singletenant netleased properties:
What is a singletenant netleased investment?
A singletenant netleased 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 longterm 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 fullservice leases and net leases.
A fullservice 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 fullservice 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 netnet leases or triplenetleases. 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 singletenant netleased investments different from multitenant buildings? Multitenant 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 netlease 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 highmaintenance properties and then reinvesting the sale proceeds in singletenant netleased retail properties as do many land owners who have previously never received any income or tax benefits from their property.
Who can invest in singletenant netleased 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 taxdeferred exchanges or 1031 exchanges for short.
What are the benefits of investing in singletenant netleased properties?
Many people consider singletenant netleased properties as bondlike investments because of their stable predictable returns. Because tenants commit to longterm leases there’s very little releasing risk. Moreover singletenant netleased investments can be tailored to an investor’s riskreward 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 singletenant netleased properties?
While there are very few risks related to investing in singletenant netleased properties tenants with noninvestment 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 “releaseability” of a property if the nettenant were to vacate the space.
How are singletenant netleased assets valued?
Unlike traditional real estate investments whose valued is determined exclusively by the real estate itself a singletenant netleased 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 singletenant netleased property will maintain its value because of its bondlike longterm lease and the credit tenant guaranty for the lease.
When is the best time to invest in a singletenant netlease property?
Netleased properties are like allweather tires. They are good investments in both good and bad economic times and in hot and cold real estate markets. Here’s why: a singletenant net lease is guaranteed by a longterm lease at preset 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.
About the writer:nbsp;nbsp;Jonathan W. Hipp is President of Calkain Companies and founded the firm in 2005 with over 20 years experience in the Real Estate industry. While his knowledge spans a broad spectrum of real estate Jonathan is well respected for his expertise on Net Lease Investments. www.calkain.comJonathan has completed over 2 billion in Net Lease Investments throughout his career and is regularly interviewed for articles appearing in a variety of publications including Commercial Real Estate Forum Forbes Fortune Magazine National Real Estate Investor Commercial Property News Globe St. Shopping Center Business Southeast Property News Washington Business Journal CIRE Magazine Retail Traffic. He is also frequently invited to serve as a panelist or speaker at Net Lease and Real Estate conferences and seminars throughout the country.
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