Is a Single-Tenant Net Lease Best for You?

starbucks roastery exterior, crowd of people

When renting out a commercial property, there are often a number of leasing options you can choose for potential tenants. Depending on the type of property, sometimes, it’s more beneficial to only rent to one tenant, rather than many. This landlord-tenant relationship is called a single-tenant net lease in commercial real estate.

What Is a Single-Tenant Net Lease (STNL)?

A single-tenant net lease (STNL) is a type of commercial lease agreement in which the entire property is leased to a single tenant. Although this situation can apply to any commercial property, STNLs are mainly seen with retail properties like drug stores, gas stations or restaurants because those businesses sometimes occupy standalone buildings.

Some examples, said Lev Capital Senior Financing Broker Gunnar Wilmot, include “a Walgreens, a CVS, or a standalone Starbucks on the side of the highway. If you’re driving down the highway, everything that you see on the side of the road — Dollar General, Dollar Tree, Wendy’s, Pizza Hut, Jack-in-the-Box, Burger King, McDonald’s — those are all single-tenant net lease deals.”

Net leases for STNLs typically last between 10 to 25 years.

What’s the Difference Between a Single-Tenant Net Lease and a Triple Net Lease (NNN)?

A single-tenant net lease in commercial real estate is also sometimes called a triple net lease (NNN). Triple net refers to the three responsibilities the tenant usually takes on in this type of arrangement:

  1. property taxes
  2. insurance
  3. operating expenses

This deal is in contrast to a single net lease (as opposed to a single-tenant net lease), in which a tenant is responsible only for property taxes. There are also double net leases in which the lessee covers two out of the three expenses. But for STNLs in which there’s only one tenant, that tenant has an NNN property lease and pays for property taxes, insurance and operating expenses, and the landlord is off the hook for those costs.

Generally in real estate, these two types of net leases, single-tenant net leases and triple net leases, are used interchangeably, but there are some specific situations where that’s not the case.

“If it was a multi-tenant property, like if there was a Dollar Tree, next to a Starbucks, next to a gym, and they were all on triple net leases, we wouldn’t call it a single-tenant,” said Wilmot. “But we would call it triple net retail, or multi-tenant retail with triple net leases.”

Triple net, Wilmot said, mainly refers to the tenants’ responsibilities.

Advantages of a Single-Tenant Net Lease

Only having to deal with one tenant on a real estate investment comes with a number of advantages for landlords and investors, providing some long-term stability that multiple tenants might not.

STNLs Are Predictable

With a single-tenant net lease, the landlord always knows how much money they’re getting and for how long, ensuring a steady stream of income. On the other hand, with something like a residential property, cash flow can vary because the landlord always has to find new tenants when one moves out. Usually the leases last for a shorter period of time.

Expenses Are the Responsibility of the Tenant

Landlords don’t have to worry about taxes, insurance or maintenance because those are handled by the tenant. Therefore, the landlord won’t have to deal with any additional costs on the property.

“Let’s say you own a Walgreens in Connecticut,” said Wilmot. “That Walgreens is going to pay you every month for the length of their lease. And they’re also going to pay the insurance for the property, they’re going to pay for any roof construction needs; if the building burned down in a fire, they would be responsible for rebuilding it exactly as it was.”

Landlords Are Guaranteed Full Occupancy

With a single-tenant net lease, landlords also don’t have to worry about being left with empty real estate. With a long-term lease in place, the commercial property will remain fully occupied and, unlike a residential property, tenants won’t be coming and going every year. This stability leads to far less work for the landlord when it comes to looking for tenants.

Wilmot gave an example: “Think of Walgreens and CVS as the golden unicorns because they’re such massive companies, and they guarantee a lease.”

Walgreens, Wilmot explained, would be responsible for paying their net lease for the full-term. Even if they wanted to close down, which is unlikely, they would still be responsible for fulfilling their lease obligations.

“The only way [Walgreens] could get out of that lease obligation is if they file for bankruptcy,” Wilmot said. “And that would never happen. Walgreens and CVS are never going bankrupt.”

Guaranteed Rent Increases

Usually, the STNL contract includes yearly rent increases of 1 to 2%, ensuring an increase in revenue every year. This deal saves the time and effort of having to negotiate and navigate rent increases with multiple tenants each year.

Disadvantages of a Single-Tenant Net Leased Property

Despite the advantages of STNLs, there is certainly some risk involved, and investors should make sure to do ample vetting of their tenants before striking up any deals.

Landlords Are Forced to Be Dependent on One Tenant

With STNL properties, a landlord’s success is dependent on the tenant’s success. If the tenant’s business falters, or they go bankrupt and are forced to leave the property, then the landlord is left with zero income stream from that property. With something like a Walgreens or CVS, that’s unlikely to happen. For a smaller, independent business, there’s some risk.

For this reason, it’s important to conduct a thorough background check of your tenant and only rent to those whose business is likely to be profitable.

Also, very often, for large retail businesses like McDonald’s or Pizza Hut, the buildings all look the same. Every Pizza Hut has that distinct rooftop, for instance. So if a tenant you’re dependent on leaves a property, it’s often difficult to get someone else to take over.

“You’re never really going to see a McDonald’s take over a Starbucks if they just left it,” Wilmot said.

And in rural areas where business is slow, you’ll often see the former buildings for these large franchises left empty.

Rent Increases Might Be Too Low

Although there is usually a guaranteed rent increase per year, sometimes, the market rises faster than those rent increases. So while your property is generating an extra 1% in rent per year, a property with multiple tenants on shorter leases could be generating an increase of 5%, depending on the market at that time. In this scenario, you’d be collecting below market rent.

There’s No Opportunity for Appreciation

With STNLs, the tenant is locked into the property for a long period of time, whereas with multi-tenant leases, the landlord has opportunities to renovate and increase the property value. Tenants often leave or get kicked out, and renovations occur.

“With triple net retail, the rent is set every single month, every single year, for the entire lease,” Wilmot said. “So there isn’t really an opportunity to add value … You’re collecting a check every month, and your property’s not appreciating in value like an apartment building might, where you can go in and make it nicer and charge more money.”

Single-Tenant Net Leases Can Be a Great Opportunity for Investors

If you’re looking for a net lease property that will bring in consistent, steady income without having to worry about insurance, property tax or maintenance, a single-tenant property might be the best option. While there is some risk involved, renting to a major franchise like Walgreens or McDonald’s lessens that risk, as they very rarely close down, and you’ll be sure to receive your rent check on time every month.

Total
0
Shares
Related Posts