A single tenant net lease (STNL) asset is typically a free-standing building leased to one tenant. Generally, the building is either retail, office or industrial. Ideally, the tenant has committed to a long-term lease with ten (10) or more years, with regular rent increases along the way. The single tenant, is responsible to pay rent, and usually held liable to cover all of the operating expenses like taxes, insurance, utilities and repairs. This is unlike other real estate assets in which the landlord or owner is responsible to cover all of these expenses.
Another distinguishing factor with the single tenant asset class, is that here, the single tenant net lease asset’s value is determined by multiple factors and not just by the real estate itself. With single tenant net lease assets, value is determined by the tenant’s credit (risk factor), the term of the lease, and the typical location factors such as location and physical construction. These single tenant net lease assets tend have lower risk involved, and with the “hand-off” management style, are an incredible passive investment for people.
So aside from the obvious low management-intensive benefits, just why is this asset class so beneficial? As mentioned before, as these assets tend to have long term leases with regular rent increases, they tend to hold their value in a volatile economy — and with the increases in rent, it’s a hedge against inflation. Further, single tenant assets provide a steady cash flow. Yes, there are risks and when looking to invest in a single tenant asset, definitely choose one with a longer term – like a recently executed 20 year lease with an investment grade tenant (Moody’s and S&P provide great analysis on tenants, and www.netleaseadvisor.com has a great summary of tenants when looking to review an asset.
Along those lines, there is an abundance of single tenant net lease assets in the $1M to $5M range, allowing new investors to get their feet wet before moving on to the larger single tenant assets on the market. And a great way to diversify your risk, is to have multiple investments, with different tenants. As you tend to your investments and grow your portfolio, you will find yet another benefit of single tenant net lease. Major tax benefits in the form of a 1033 or 1031 exchange allow you to postpone paying capital gains taxes as long as you invest in like properties, with at least the same amount of debt. Which means, you can use your earned capital gains tax free to expand into bigger properties, only adding to your stream of cash.
If you are considering investing in real estate but are not thoroughly familiar with this type of investment, one of our specialists at Calkain can provide you with the information you need to know. We can also inform you of suitable opportunities, including any single tenant real estate investment that may meet your portfolio needs. Call us for an appointment.