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Evaluating a Single Tenant Net Lease (STNL) Investment

The old adage is location, location, location.  However, that’s only one small part in evaluating a net lease investment. There are actually several key components you must look at when analyzing any opportunity.

  • Lease Structure – Different from typical real estate transactions, an analysis of the lease is of utmost importance. How much of the burden has been shifted to the tenant – is it a true NNN lease or NN lease?  Does the lease account for inflation with periodic rent increases?  Are the tax burdens placed on the tenant or the landlord?  How much term remains on the lease?
  • The Physical Real Estate – What is the condition of the property? Is it a special-purpose property or will you be able to convert the property to different uses for future tenancy?  Are any of the fixtures/improvements by the tenant convertible to future tenants?
  • Location – Yes, location does matter. Are you looking at a property that is supported by the area demographics?  Is there good visibility from main thoroughfares?  And do you have good ingress/egress to the site?
  • The Tenant – What is the credit worthiness of your tenant? Who guarantees the lease?  There’s a lot to look at with a tenant.  Let’s dive a little deeper into this.

It’s Called Single Tenant Net Lease for a Reason

Aside from the lease structure, understanding the ability of the tenant to remain solvent over the life of the term (credit worthiness), is critical to evaluating your net lease investment.  You must focus on the tenant.  As most net lease investments are single tenant (or occasionally 2-3 tenants), the risk is wrapped up in their ability to meet the terms of the lease.  The higher the likelihood they will default, the higher the cap rate should be, as the capitalization rate indicates the risk factor – directly representing the relationship of the net income and the price an informed investor is willing to pay.

It’s important to understand who guarantees the lease – is it a Fortune 500 company or privately held?  You will want to fully grasp the financial strength of a tenant.  As a private company, you’ll need to examine their credit report, sales history, business plans and their financial reports and tax returns.

Calkain Credit Rating Report - April 2017

Click here to download our latest credit rating report!

If it’s a public company, the information is readily available.  There are a lot of sources available to garner this information and Calkain makes it easy for you.  Our research team puts together a Semi-Annual Credit Rating Report.  In the report, it highlights many of the major tenants in the net lease sector and provides current ratings based off of Standard & Poor’s and Moody’s ratings.  Movement for each tenant, either positive or negative in their credit standings, as well as comments on plans for growth/store reductions is provided.  To view the latest report, click here.

For additional information on evaluating tenants, check out, also powered by Calkain.  A useful tool for investors, Net Lease Advisor is a compilation of data and research about the top tenants in the marketplace.  Net Lease Advisor is the go to source for analyzing investments with regard to tenancy, offering comparable data, property and lease information, tenant overviews and credit ratings.

Traci BidingerEvaluating a Single Tenant Net Lease (STNL) Investment