Low risk or something more?

 

Single tenant properties go by a few other names such as “Triple Net” and “NNN” properties. In essence they are properties that have a single building occupied by a single occupant. The occupant, or tenant, leases the property from the property owner and generally is responsible for all operating costs and pays the owner a set rent over a long term. This structure makes this type of investment extremely easy to manage, essentially just cash the monthly rent checks and let the tenant handle everything else. In this way they are very similar to land leases, which I discussed previously.

Drive around town and you will see dozens of these types of properties: Walgreens, CVS, 7 Eleven, Autozone, Taco Bell, and Chase Bank are all good examples. These types of properties are typically built especially for the tenant by a developer who will then resell the property to the investment community at a price based upon a multiple of the future rents. Generally expect to see a smaller 7 Eleven property, for example, to sell for around $2 million while a much larger Walgreens property may sell for $5-7 million. The values of these properties are set by a variety of factors:

Lease term: the longer the better! A Walgreens can have a lease term of 25 years, while a smaller property, like a Verizon or a Mattress Firm, could have a ten year initial term. The longer the remaining lease term, the more valuable the property, as there is a longer guaranteed rental income stream. When considering a Single Tenant investment if the property has only half the number of years left out of the full term, for example, the investor should be cautious, as there is always the risk that the tenant won’t renew their lease. That translates into added risk and as a result the property must reward the owner with more return on his more risky investment. Because of the fixed levels of rents set forth in the underlying lease, this in turn means that the value of the property must decrease.

Rent Schedule: the rent schedules are structured in a variety of different ways, but typically a particular retailer or user will utilize the same structure at all of their locations. For example, many larger chains like a Walgreens, will pay a fixed level of rents throughout the entire lease term. Others may have preset increases every five or ten years or even annually. Generally retailers with stronger credit and balance sheets can command a better deal for themselves. Alternatively some tenants are just more sought after by investors which also translates into better deals for themselves (not necessarily the investors)

Corporate guarantee: most single tenant investments are tenanted by major national companies, and typically public companies that have more discernible credit ratings. Those single tenant properties that are backed by an S&P A rated company will be viewed as less risky compared to a B- rated property and as such will have to pay the investor less of a risk premium. The lower the yield means a higher price for a set rent schedule. Another important consideration is whether the tenant on the lease is actually the master corporate entity that you are expecting, it could be a franchisee instead, which might not have the wherewithal to weather an economic storm.

Sales and Performance: one often over-looked aspect by many investors is the underlying performance of the tenant. If the tenant’s sales aren’t good, there’s a good chance the tenant won’t be renewing their lease once their lease term expires. Worse yet, the tenant could actually close down, even though they may still be required to keep paying their rent obligations through the balance of their lease term. Sometimes you won’t be able to get the actual sales, but just get a general percentile standing.

There are several other important factors to consider as well when considering a Single Tenant property and what an appropriate valuation may be, email me and I will be glad to share five more important factors with you.

Dougall McCorkle, MBA

Sales Associate and Commercial Specialist
Premier Commercial, Inc., Licensed Real Estate Brokers
Direct: 239.213.7234

Cell: 239.860.3368
dougall@premiermail.net