What is a Single Tenant Net Lease?
What is a Single Tenant Net Lease?
What is a single tenant net lease? What are the advantages and disadvantages? What are the risks? How is a single tenant net lease different from other types of leases? We will discuss all these questions in this article. Let’s start.
A Single-Tenant Triple-Net property (also known as “Net-Lease,” “STNL,” or “NNN”) is a property that is entirely leased to one tenant and has a lease arrangement in which the tenant is liable for all property-related expenditures, leaving the landlord with little duties. NNN properties are a popular option for those who want to invest in real estate but don’t have the time or inclination to maintain a property actively.
The term “Triple Net” refers to the tenant’s expenditure responsibility. The “nets” refer to property taxes, insurance, and operational costs. There are also “Gross,” “Single-Net,” and “Double-Net” leases, with each “Net” indicating more responsibility on the tenant’s shoulders rather than the investor’s.
In a “Single Net” lease, for example, the tenant normally pays solely for property taxes, but in a “Triple Net” lease, the tenant typically pays for all taxes, insurance, and operational costs. It is crucial to remember that there are many different interpretations of what a lease is, and you should always read the actual lease agreement to comprehend the rental terms and conditions fully.
What are the main features of single tenant net lease?
Long-term leases are an appealing aspect of many NNN properties. These properties often have new lease periods ranging from 10 to 25 years, with various lease renewal options. Of course, these properties may be purchased or sold at any time throughout the lease period, so an investor may not realize the complete lease term.
NNN tenants may be found in a wide range of property types, including commercial and industrial, although they are most common in retail buildings such as fast-food restaurants, convenience shops, petrol stations, and large box retailers.
The asking price for a Triple Net property is normally calculated by dividing the property’s yearly net operating income (NOI) by the purchase price. A cap rate is the projected initial unleveraged rate of return on investment. Because the renter is liable for all expenditures, property revenue is usually equal to the tenant’s rent.
The credit quality of the renter is perhaps the most critical consideration when selecting a Triple Net property. Because they only have one tenant, the property’s financial success is mainly determined by the tenant’s capacity to pay rent during the life of the contract. Credit agencies (Standard & Poor’s, Moody’s, or Fitch) often provide credit ratings to larger corporations.
Credit ratings indicate the possibility of a corporation failing to meet its financial commitments. When everything else is equal, buildings leased by solid tenants with “investment-grade” ratings often sell at lower cap rates than those inhabited by non-investment-grade tenants.
What are the main benefits of single tenant net lease?
Single-tenant net lease investments are often turnkey acquisitions that provide a consistent stream of cash flow month after month, year after year.
A single tenant net lease is also an excellent investment for retirees, busy professionals, beginning investors, or those just wishing to add a low-maintenance property to their portfolio.
Unlike multi-tenant properties, single-tenant net lease owners are exempt from capital renovations, enabling the owner to devote his time and money to other endeavors.
Single-tenant net lease investments are great turnkey properties, whether you’re trying to diversify your portfolio or just add a no-hassle cash stream.
Single tenant net lease vs. Triple Net Lease
In commercial real estate, a single tenant net lease is commonly a triple net lease (NNN). The term “triple net” refers to the three obligations that the renter often assumes in this sort of arrangement:
This arrangement differs from a single net lease (as opposed to a single-tenant net lease), in which a renter is solely liable for property taxes. There are also double net leases, in which the lessee bears two of the three costs. However, with STNLs with just one tenant, that tenant has a NNN property lease and pays for property taxes, insurance, and running expenses, leaving the landlord out of the loop.
In most cases, these two forms of net leases, single tenant net leases and triple net leases, are used interchangeably in real estate, although there are certain exceptions.
What are the main disadvantages of single tenant net lease?
Despite the benefits of STNLs, there is always some risk involved, and investors should be careful to verify their tenants before entering into any agreements thoroughly.
Rent increases may be insufficient
Although rent increases are normally guaranteed each year, the market may often outpace rent increases. So, while your property generates an additional 1% in rent every year, a property with numerous tenants on shorter leases may generate a 5% rise, depending on the market at the time. In this case, you’d be paying below-market rent.
There is no possibility for praise
STNLs bind the tenant to the property for an extended length of time, but multi-tenant leases allow the landlord to improve and raise the property’s value. Tenants often depart or are evicted, and improvements take place.
Landlords are compelled to rely on a single renter
A landlord’s success with STNL properties is contingent on the tenant’s success. If the tenant’s business fails or they declare bankruptcy and are forced to vacate the property, the landlord is left with no revenue from that property. That’s unlikely to happen in a store like Walgreens or CVS. There is some danger for a smaller, independent firm.
As a result, it’s critical to run a comprehensive background check on your renter and only rent to people who are likely to be lucrative.
We hope that in our article, we were able to answer all your questions about single tenant net leases. Given all the advantages of a single tenant net lease, we can say with confidence that this is a very pretty good deal for the investment. We hope that after analyzing all the risks, advantages and disadvantages, you will be able to make an informed investment decision.
« Previous Next »