Net Lease 101

Why Net Lease?

A net lease requires the tenant to pay, in addition to rent, some or all of the property expenses that normally would be paid by the property owner, including real estate taxes, insurance, maintenance costs and utilities. Typically, net lease assets tend to be single tenant, free standing buildings such as banks and fast food restaurants.

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 single-tenant, net-leased properties, which many investors also call a corporate bond combined with real estate investments that still make sense today.

Net Lease Investments Explained

Net Lease 101 was created to provide answers to basic questions about the net lease industry. No need to search all over the internet when you can ask the experts of this niche property type. If you don’t see the answer to your question, please click the button below to contact us and leave it to Calkain. We will send the answer directly to your inbox!

A net lease is an agreement between a tenant and a landlord where THE TENANT, not the landlord, is responsible for paying rent plus some or all of the operating expenses of the building such as taxes, insurance premiums, repairs, and utilities. 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.

Asingle tenant net lease 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 long-term lease – usually longer than 10 years, and as long as 25 years with increasing rent over the lease term.

Multi-tenant 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 ten years. That means that the building’s financial performance is vulnerable to the ups and downs of the market.

Many net lease 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 high-maintenance properties and then reinvesting the sale proceeds in single tenant net lease retail properties, as do many land owners who have previously never received any income or tax benefits from their property.

Net lease 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 (REITs,) life insurance companies and pension funds. Net lease properties also are very attractive to investors who need to do 1031 and 1033 tax-deferred exchanges.

Many people consider single tenant net lease properties as bond-like investments because of their stable, predictable returns. Because tenants commit to long-term leases, there is less re-leasing risk. Moreover, single-tenant, net-leased investments can be tailored to an investor’s risk/reward 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.

While there are fewer risks related to investing in single tenant net lease properties, as compared to more speculative real estate investments, tenants with non-investment 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 “re-leaseability” of a property if the tenant were to vacate the space.

Unlike traditional real estate investments whose valued is determined exclusively by the real estate itself, a single tenant net lease 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 single tenant net lease property will maintain its value because of its bond-like, long-term lease and the credit tenant guaranty for the lease.

Net lease properties are like all-weather tires. They are good investments in both good and bad economic times and in hot and cold real estate markets. Here’s why: a single-tenant net lease investment is guaranteed by the lease at pre-set 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. That means you will derive a predetermined income from your investment, as long as the tenant is occupying the asset and current with the terms of their lease.

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Mike VangsnessNet Lease 101