It’s official. The National Real Estate Investor just dubbed the Single-Tenant Net Lease sector “the bedrock of commercial real estate investment.” What’s more, the commercial real estate website went on to predict that “all signs point to the sector remaining in solid shape for the foreseeable future.”
Little wonder. There are subtle nuances to the STNL structure that make it stand out from, and in many respects ahead of, more traditional leases–making it a very appealing fit for investors as well as for creditworthy tenants.
As the name implies, the focus of the STNL is on a single tenant or company, for a term that can stretch from a minimum of 10 years to as long as 25 years. Let’s look at each of those factors separately.
First, by maintaining a single focus on one tenant or company, the value of the asset, typically a standalone building, is less impacted by the market or economic conditions of multiple tenants. Add to that the creditworthiness of that single tenant, and the security that’s built into the STNL grows exponentially.
The length of the lease is also a major factor in the ongoing profitability of the investment and the value of the building. STNLs provide a rare degree of security in the form of a long-term cash flow–plus rent escalations built into the term. When compounded by normal upkeep, the asset value can only increase over the life of the term.
There is also a difference in terms of freedom for the landlord and control for the tenant. In a triple-net lease (NNN), for instance, all taxes, insurance and the aforementioned maintenance and upkeep fees are picked up by the tenant, creating a virtually hands-free environment for the owner, who has freed up capital for other purposes, be it additional investments or capital programs. Meanwhile, the lease structure provides a fully deductible rent scenario for the tenant.
Certainly, no lease is recession-proof or provides an absolute guarantee against changes in market dynamics. But the single-tenant net lease provides both the investor and the tenant with as much security as is possible against shifting conditions. In this way, building a real estate portfolio is much like building a house. It’s always wise to build on bedrock.