STNL property investments have many advantages. Typically, they can be a safer and more secure real estate investment. Looking back, it is safe to say 2018 was a seller’s market. Although cap rates have increased over the past 12 to 18 months, certain property uses have remained in high demand such as gas and convenience stores, grocery stores, quick-service restaurants, and medical-related tenants. These also happen to be some of the most sought-after property uses and are typically leased to investment grade tenants or tenants with balance sheets which have been solid for years. The dependability of cash returns from these types of properties are independent of stock market performance, making them an attractive alternative to stock market investing, which can be incredibly reactionary, especially in the midst of an election season. STNL property investments can also be eligible for a 1031 Exchange capital gains tax deferral.
Current real estate market conditions point to the importance of investing in well-located, single tenant commercial real estate with a tenant with solid financial standing on a long-term net-lease as a way of supplying stabilized income for the investor. Many investment grade tenanted properties in the net-leased space have shocked investors as their values have rallied back to levels that had been in hiding since before the initial warning signs of the Great Recession. Chances are, you have seen retail, industrial or office spaces that fits the STNL property description in your neighborhood. These types of STNL property investments represent a more stable passive way to invest in commercial real estate market during times of uncertainty.
In this article, we will discuss the advantages of single tenant net lease — STNL property investments, particularly when these investment criteria are in place; he presence of an investment grade tenant, a long-term triple net lease, recent construction and a quality property location.
Investment Grade Tenant
An investment grade tenant is defined as a tenant with a long-term debt rating of Baa1 or better as rated by Moody’s or a BBB- or better as rated by S&P. It is common for larger companies to maintain ratings of this caliber. As a landlord, securing a strong investment grade tenant, with a corporate guarantee, is the first step. It can make or break the lease set to follow. A financially strong tenant can withstand the test of the fluctuating and tumultuous market that comes with uncertainty around political climate and economic tensions.
Long Term Triple Net Leases (NNN)
There are many different kinds of net-lease agreements. Depending on the net-lease agreement, the tenant is responsible for the rent, insurance, property taxes and maintenance of the property. This is typically true for single tenant net lease agreements. There are also “Gross,” “Double-Net” or “NN” and “Triple-Net” or “NNN” agreements. For every net added to the agreement, there is more responsibility falling on the tenant instead of the investor. The longer the lease term with an investment grade tenant, the greater the assurance of stable cash flow for the holding period of the investment. A long-term lease should be a minimum of 10 years remaining from the start of the investment hold period. The longer the lease term beyond a projected investment hold period, the greater the chances the investors have of the property being sold at a maximum market price at their exit.
Recent or New Construction
A new or recently constructed building typically means less maintenance expenses over the hold term of the investment. The newer the building the higher the probability it is likely up to “code” meaning less resources are used to for property upgrades.
Large chain, investment-grade tenants typically enjoy a well-researched and strategic location within a highly trafficked marketplace and garner a greater share of business. Their location, brand recognition, and fulfillment of a strong local demand helps to ensure a more dependable cash flow and return on investment.
A Single Tenant Net Lease (STNL} property that checks all the boxes of a fundamentally sound real estate investment can assuage concerns of even the most cautious of investors. STNL property investments tend to be a more stable bond-like investment that delivers dependable, monthly cash flow.
The NAS Investment Solutions executive team has underwritten a property leased to Walgreens in Burlington, Vermont. The lease is an absolute triple net (NNN) with no landlord responsibilities. The tenant is responsible for reimbursement of all costs including real estate taxes, insurance, and all other maintenance costs. Below are features of the Walgreens property investment opportunity, it’s the latest of STNL property investments offered by NAS Investment Solutions, that checks all of the criteria boxes for an attractive STNL property investment.
- Investment Grade Tenant – Walgreens is rated BBB by S&P Global
- Long-term lease – This Walgreens has an absolute-NNN lease term in place with approximately 16.5 years remaining with 50 years of options
- Location, Location, Location – 5% of Burlington, Vermont residents earn over $100,000 a year. Burlington has the fourth lowest unemployment rate in the country at 2.3%, based on 2018 data. The retail space is just .25 miles from Interstate 189, located within Burlington’s South End retail trade area. The surrounding retail area has a 100% occupancy rate within a 1-mile radius from the property. There are over 1.5 million square feet of office and retail inventory in the same radius, making this an extremely desirable submarket with minimal opportunity for new developments.
- Recent or New Construction – Erected in 2010, the building checks the box of age preference. The building is 26,340 sq. ft., two-stories high, and complete with a drive-thru pharmacy.
- Comprehensive and Detailed Underwriting – The Walgreens property was underwritten by an experienced NAS executive team that has a proven track record of underwriting commercial property investments.