Single Tenant Real Estate as an Investment
With today’s stock market so volatile, people are consistently asking, what else can they invest in to diversify their portfolio and give them security? Diversification into single tenant commercial real estate could provide those answers. Most people don’t realize that they can purchase and own real estate with companies such as Wal-Mart, Walgreen’s, Publix, Lowe’s, 7-Eleven, Good Year Tire, Advance Auto, Chase Bank, Chipotle, as their tenant. These Corporations prefer to lease, rather than own many of the properties where they conduct their business. We will get into the “why” tenants lease, rather than “own” their properties in more detail below.
Our company specializes in working with new and seasoned investors alike, to help them diversify their investment portfolio into real estate, by owning free-standing single tenant real estate property with tenants such as those mentioned above. This helps investors diversify their investment portfolio and reduce their risk from stock market options, and provides a better return than what Government Bonds, Mutual Funds or Certificates of Deposits offer.
What a lot of people don’t know is that these companies are moving into free-standing single tenant retail buildings instead of shopping centers, and they are leasing those properties from Landlords rather than owning them. Individuals Investors, Investment Groups, Real Estate Investment Trusts, and other Institutional Investors and Corporations from around the country own these types of asset and collect rent from them.
Free-Standing Single Tenant Net Lease Defined
A Free Standing Single Tenant Net Lease Property is a commercial property that is leased to one Tenant; be it a Corporation, a Franchisee, or an Individual, for a defined period of time. The signed lease agreement will define the length of time the tenant will be in occupancy (usually 10 to 25 years for new properties). During that defined period of time, the lease will outline that the tenant will be responsible for paying or reimbursing the landlord for certain real estate costs associated with operating out of that property, such as the real estate taxes, the property insurance and liability insurance and in many instances also maintaining the entire property.
Triple Net Leases
If you purchase a property that is represented as having a Triple Net Lease in place , then per that lease, and during the term of the lease, that tenant will be responsible for paying all costs associated with the real estate. The tenant will be responsible for paying the following expenses.
Paying or reimbursing the landlord for the properties real estate taxes when they are due.
Paying all insurance on the property (which includes property and liability). In this instance, tenant will add the landlord as an additional insured on their liability policy and usually as Loss Payee on the Property Insurance.
Maintaining the entire premise which includes all interior and exterior portions of the building, all structural elements of the building, including the roof, all electrical, or plumbing problems, the heating and air conditioner units, the parking lot and the landscaping.
As an investor, if you purchase a property with a triple net lease in place, you as an investor and real estate owner will have very limited, if any responsibilities with regards to owning that piece of real estate. This is the most preferred type of lease in this type of market. However there is another type of lease, which is called a Double Net Lease and that is defined below.
Double Net Leases
In a double net lease, and during the term of the lease, the tenant is responsible for the following:
Paying or reimbursing the landlord for the properties real estate taxes when they are due
Paying all insurance on the property (which includes property and liability). In this instance tenant will add landlord as an additional insured on their liability policy and usually as Loss Payee on the Property Insurance.
In a double net lease, the other elements of number 3 in the definition of triple net may or may not be included as the tenants responsibility, and each lease needs to be read very carefully to determine what remaining expenses will be paid for by the tenant and what expenses if any will be the responsibility of the Owner/Landlord.
Why Tenants Lease
In lieu of taking out a loan to finance the development and ownership of a piece of property, tenants lease property. There are several reasons and advantages for doing this.
Leasing reduces a Companies upfront capital outlay
A lease allows a Company the extra cash to reinvest in their business at higher returns.
A lease is not a liability on the balance sheet, such as a mortgage would be
The lower liability on the balance sheet, increases there credit rating and lowers there cost of borrowing capital for growth.
It allows a Company more borrowing power
Along with a multitude of other reasons.
How the Single Tenant Net Lease Came About and How It Works
As stated before, in lieu of owning property, companies have made the financial decision that it is in their best interest to lease. Per years of research and market studies, companies have determined that sales increase dramatically if they operate out of their own free standing building. So how do companies get their own free standing building, without owning it? They find developers who will build it for them and then they lease it back from them once it is complete.
Companies over the years have worked with what they call Preferred Developers. If a Company wants to be in a certain market or area, they contact their preferred developer to find a piece of property for them and build it for them. In return, they will lease it back from the developer on a net lease basis.
A developer will then, based on the Companies site criteria, go out and locate one or several sites for the Company, put them under contract with their own money, and then present the site(s) to the Company. If the Company approves the site, the developer will then purchase the land, if they don’t already own it, and work with that Company to design and build a building for the Companies specific needs. This building is what is usually called a Company’s Prototype Building. Once everything is agreed to, in addition to purchasing the land, the developer will pay for all site, development and construction costs associated with developing their prototype building.
Prior to construction, the Developer and the Company will draft and sign a lease, for the premise, so that after the developer has closed on the land and built the Company’s building to their specifications, the Company will then accept the premise, and begin getting it ready to open for business. Once the tenant accepts the premise and typically once they open for business, then the Company lease term begins and the begin paying the developer/owner/landlord rent per the terms of the lease.
The developer is free to keep this property and receive rent from this tenant; or the developer can sell this new free standing single tenant net lease property on the open market to any investor. Once an investor buys this from the developer, the investor will own the real estate (land and building), and the developer will assign over the lease and the lease payments to the investor at closing. So now the investor becomes the new landlord for this property.
There are 3 tiers of lease guarantees and security when buying a triple net lease. 1. A corporate guarantee 2. A franchisee guarantee or 3. An owner guarantee.
A Corporate Guarantee is the best guarantee. This is where the Parent Company of a Corporation signs the lease, or sign’s a separate guarantee to the lease, which binds that Corporation to all the obligations of the Lease for the entire term of the lease. For example, if Walgreen’s signs a 25 year triple net lease, then they would be obligated to perform all the obligations of that lease for the entire 25 years. If Walgreen’s decided to close that store, they would still obligated to pay the landlord the monthly rent due each month until the term of that lease expires, as well as to continue to pay all the expenses associated with the property, i.e. real estate taxes, insurance, and all property maintenance as defined in Triple Net Lease. Sometimes after a tenant closed a store, and as a way to subsidize their expenses, they my lease (called sub-lease) the property to another Company. However, the original tenant is still obligated to the landlord, for the monthly rent and property expenses, and are generally not relieved of these obligations unless agreed to by the landlord or it’s spelled out separately in the lease.
A Franchisee Guarantee is the same as a Corporate Guarantee, except that the lease is only guaranteed by the net worth of the Franchisee.
3 An Owner Guarantee is also the same, but in this instance, the lease is only guaranteed by the net worth of the individual owner.
When people think of real estate as an investment, many people think it is too cumbersome and very time consuming and would rather stick to the stocks and bonds market, which appear as a more simplistic investment vehicle. Most commercial real estate investments do require owners to deal with a multitude of tenant issues, whether it’s fixing something that is broken or leaking, having to deal with late payments, eviction notices, tenants leaving, vacancy, tenant build-out, broker commissions for leasing space, invoicing tenants for rent and expenses etc. For this reason many investors shy away unless they feel they have the wherewithal, time and expertise to manage such an investment.
This is where single tenant net lease bridges the gap and provides an alternative advantage to owning commercial real estate as an investment vehicle without all the daily issues that normally come about. Not only does it diversify ones portfolio of investment vehicles, if purchased correctly, it can basically be a hands off investment whereby virtually all you do is go to the mailbox once a month to collect a check. This has even been simplified more today, as many tenants provide direct deposit.
It should be noted however, that due to the simplicity and limited risk associated with the ownership of single tenant net lease properties, the returns are going to be lower than what you would find from a more traditional multi-tenant acquisition. However, the nice thing about owning real estate as an investment, over stocks, is real estate values don’t typically go to zero. You will always have a tangible asset in your portfolio.