Single tenant properties are typically leased to larger businesses like big box stores or other national or regional chains. Because they are dependent on only one tenant to provide income, they are generally viewed as safer investments than multi-tenant properties like apartment buildings or strip malls, where multiple vacancies can eat into profits very quickly. Single tenant properties have different options for leases, but the best option for the owner is the triple net lease.
What is a Triple Net Lease and Why is it a Good Option?
The three main types of leases for single tenant properties are the single, double, and triple net leases. In a single net lease, the tenant is responsible only for the rent and the property taxes. A double net lease includes the single net lease requirements plus the property insurance, while a triple net lease (NNN) makes the tenant responsible for all expenses related to the property in addition to the rent and utilities. The property owner is typically only responsible for the physical structure and any related parking area.
A triple net lease is highly desirable for a landlord of a single tenant property. A triple net lease is very low risk for the owner, as the tenant takes care of almost all expenses related to the property. These leases are typically for 10 to 25 years, providing a steady income for a considerable period of time. They also often include renewal options. The NNN is a very low maintenance lease for the property owner. It is ideal for those investors not wanting to be active in managing a property, instead providing a source of income with little to no time required.
Because the triple net lease puts all the ancillary expenses on to the tenant, the main factor that is up for negotiation is the amount of the rent. Rents in NNN leases will tend to be lower, as the tenant is paying for all the other associated costs. This makes single tenant NNN lease properties less lucrative overall, but guarantee a steady income stream. That is, if the tenant is a stable, solvent, and profitable company able to pay the rent. The key to NNN leases is finding such a tenant.
Current and Future Prospects for Triple Net Leases
The COVID-19 pandemic hit the real estate market like it did all others sectors of the economy. One area that was very stable during this time, however, was the single tenant NNN lease properties. The tenants of many of these properties were important sectors that were able to stay open in some fashion even in the depths of the pandemic. Grocery stores, big box retailers, and pharmacies, for example, stayed open and weathered the storm. These businesses were able to continue to pay their rents and thus continued the income stream for property owners.
One reason that single tenant NNN lease properties are so resistant to market fluctuations is that they are typically leased to national or regional entities with great credit ratings and large monetary reserves. Local franchisees of national or international brands also have the backing of those corporations, so they, too, are able to withstand poor economic times.
NNN lease properties do carry some very big risks if the investor is not careful and fails to do their research. Many of the biggest retailers close between 5 and 10 percent of their worst performing locations annually. This is a smart move, because it allows them to shift monetary resources to potentially better locations. A smart investor would be wise to thoroughly investigate any potential single tenant NNN lease properties before taking the plunge. Properties with leases expiring within a couple of years are high risk, as if the tenant chooses not to renew, the property could sit vacant for a considerable time while a new tenant is found.
Location, parking lot size, ease of access to major highways, and other factors can make or break a NNN lease property. So, too, can properties in need of serious remodeling or upgrading. Any of these issues can cause a longtime tenant to decide to seek a better location elsewhere. The makeup of the surrounding area makes a huge difference, as well. What sort of competition is the tenant facing within a few miles? Are there numerous vacant properties in the area, giving consumers less reason to visit? What are the demographics around the property, and are they favorable to the tenant’s business? These are all questions that a wise investor needs to consider before taking on a single tenant NNN lease property that could be a steady income stream for years or a vacant drain on their resources.