What is a Single-Tenant Net Lease?
Who, What, Where, and Why - A Single-Tenant Net Lease Overview
A single-tenant net lease (STNL) property is one that is rented by a single specific tenant. The "net lease" aspect refers to the tenant's responsibility to pay one or more of the following nets:
- Property taxes
- Operating expenses
Where does the name come from? The terminology "triple net" represents a lease that removes each of these three expenses (nets), reducing the landlord's responsibilities to zero.
A single-tenant net lease property can include a number of lease structures, such as a single net (N) lease, double net (NN) lease, triple net (NNN) lease, or ground lease. It all depends on the number of landlord responsibilities.
Single Net (N) Lease - With a single net lease, the tenant pays one of the nets (usually property taxes), while the landlord or investor is responsible for paying the remaining property expenses and covering the costs of maintenance.
Double Net (NN) Lease - With a double net lease, the tenant typically pays for property taxes and insurance while the responsibility to pay for operating expenses and maintenance lies with the investor. Generally, the landlord responsibilities in a double net lease include roof and structural maintenance and, in colder climates, snow removal.
Triple Net (NNN) Lease - With a triple net lease, the tenant pays for all of the three nets - property taxes, insurance, and maintenance - and there are no landlord responsibilities. This is the most highly sought-after lease structure because it offers the lowest risk for investors and, hence, the lowest return.
Single Tenant Net Leases vs. Other Lease Structures
Net leases are different from gross leases - these two types are generally considered opposites. With a gross lease, a tenant pays a predetermined amount for rent, and the landlord is responsible for all expenses, including insurance, maintenance, and property taxes. In a net lease structure, on the other hand, the tenant takes responsibility for liabilities like property taxes, insurance and operating expenses.
Most rental agreements for non-commercial properties are gross leases. In the world of commercial real estate, however, net leases are far more common. That's because they make for a more passive investment and offer landlords a more consistent revenue stream.
- ✔ Triple-Net (NNN) properties usually have long-term leases. They often offer primary lease terms between 10 and 25 years, and they typically provide multiple lease renewal options and rent increases along the way.
- ✔ With single-tenant net leases, the landlord does not have to collect rent from multiple tenants - instead, they just have one to worry about. Hence, managing rent collection and minimizing risk is easier. Most STNLs are designed to give the landlord minimal responsibilities.
- ✔ STNL tenants are usually investment-grade tenants who are creditworthy and have a third-party credit rating assigned to them. That means investors are better equipped to accurately analyze risk.
- ✔ In traditional real estate, loans are normally backed by property value and personal guarantees. With STNLs, however, leases often come with corporate guarantees from creditworthy tenants. That makes refinancing and financing of STNL acquisitions easier - they are one of the easiest and fastest asset classes to underwrite by lenders.
- ✔ 1031 Tax Deferred Exchanges allow investors to defer their capital gains while receiving monthly income.
- ✔ STNLs have a very high vacancy risk as there is only one tenant. If that tenant leaves or goes bankrupt, the income suddenly drops to zero. In other words, STNL investors can be making 100% of their potential income on a property or none of it.
- ✔ Usually, STNL buildings are "built-to-suit," meaning that they are designed and fitted with a specific tenant's use in mind. If the investor wants to rent the building to a different tenant later on, the landlord will incur additional expenses related to refurbishing and taking the time to release the building.
- ✔ High-cap-rate STNL deals can be misleading to investors who are not familiar with corporate versus franchisee lease guarantees and lease language such as early out clauses. These often surprise investors who are new to the space.
What to consider in a Double Net (NN) vs. Triple Net (NNN) Lease's...
The principal concern comparing NN with NNN leases is the level of involvement the investor wants to have in the property. An active investor will prefer NN leases, in which the tenant pays only property taxes and insurance premiums while the investor looks after the maintenance of the property.
A passive investor will prefer a triple net lease, or NNN lease, in which the tenant is responsible for all taxes, insurance, and maintenance of the property. As NNN leases are usually long-term and the tenants have third-party credit ratings, they provide a high-quality stream of predictable income over a long period of time.
When using NNN leases, even if the maintenance expenditure is more than expected, the tenant has to bear the additional cost. For that reason, the cap rate of NN leases is typically higher than that of NNN leases (for the same property) because of additional expense exposure that is incurred by the landlord when using a double net lease.
Depreciation Gives an Advantage to NNN Leases
NNN leases and bonds are quite similar in risk and returns from an investor's point of view. NNN leases with rent increases perform like an inflation-protected bond guaranteed by a National, Credit and/or Fortune 500 tenant rather than a government or municipality.
Triple net leases are real estate investments and not paper securities, where tax advantages from depreciation offer more compelling risk-adjusted returns. The investor will have to pay back the depreciation when he sells the property. However, this capital gain can be deferred by using a 1031 Tax Deferred Exchange.
What Should You Look for in STNL Properties?
When you're evaluating a single tenant net lease property - whether that is a single, double, or triple net lease - there are a few important factors that you will want to evaluate. It is important to consider both property value and tenant strength when considering an STNL.
Especially when you are reviewing single-tenant properties, like the ones many investment-grade tenants prefer, your tenant concentration can be only either 100% or 0%. That is to say that you'll be generating 100% of your potential cash flow or none of it.
For instance, some common STNL tenants include drug stores like CVS, Walgreens, or RiteAid; auto parts stores like AutoZone or O'Reilly Auto Parts; fast food restaurants like Taco Bell, McDonald's, or Chick-Fil-A; and medical facilities like DaVita or Fresenius Kidney Care. If these tenants move out, their unique spaces may be difficult to fill.
In order to ensure that your single tenant net lease pans out, you'll want to ensure that the property you're investing in meets the qualifications your tenant prefers in its locations. For example, Starbucks coffee shops prefer urban and suburban locations with a median household income of over $60,000 per year.They also look for placement along strong retail corridors near busy employment districts, multiple access points, dedicated parking, and locations on the morning commute side of the street. Remember, the longer your tenant stays, the longer you continue collecting rent and making money. So ensuring that your property meets the requirements of the tenant is key. This is especially important because of the unique nature of these properties. Because of their large size and the common nature of custom build-outs, single-tenant net lease properties can be challenging to turn over to appeal to other tenants. So, you want to make sure you've selected a high-traffic location where your tenant will thrive.
On the upside, SNTL tenants are usually large companies with strong balance sheets, so you can count on your payments arriving on time each month and you will not have to spend your time chasing down your subpar tenant to get your hands on your rent check.
STNL Overview in 2023
Here are a few fast facts to help you get a better picture of what triple-net leases look like in 2023 for single-tenant properties.
|STNL Properties at a Glance
|Average sale price
|$1,500,000 - $2,000,000
|Average NOI (net operating income)
|Average square feet
|Varies depending on industry
|Average lot size
|1.5 - 2.5 acres
|Typical lease term
|10 - 25 years
|Average cap rate
|4.5% - 6.0%
|Common tenant industries
|Auto parts, dollar stores, drug stores, convenience stores, gas stations, car washes, fast food restaurants, childcare centers, medical clinics, and more
Sector Trends - Supply, Demand, Cap Rates, Flows
Over the last 10 years, the demand for U.S. single tenant net lease properties has increased as interest rates have dropped to historic lows and investors seek higher yields. Cap rates are expected to gradually increase as interest rates rise. In the past 18 months alone, U.S. rates have gone up 5.25 percentage points.
Additional factors to consider that are impacting supply and demand are the new Financial Accounting Standards Board (FASB) stipulations for capital leases. These new regulations require that leases longer than a year be recorded on a company's balance sheet, representing more risk. This development is expected to reduce tenant demand for long-term leases, and consequently impact supply, demand, and cap rates in the commercial real estate market.
In recent years, single-tenant NNN leases have become a strong alternative to stock market investing and an effective way to round out investment portfolios. They tend to yield ROIs between 5% and 7%, they balance the high-risk nature of the stock market, and they offer a dependable wealth-building strategy. Plus, the tax benefits help preserve your capital.Auto Parts Stores
Auto parts stores are part of an $81 billion market with over 66,000 businesses. The industry employs nearly 450,000 people in the U.S. alone. Common net lease tenants like AutoZone, O'Reilly Auto Parts, and Advance Auto Parts continue to perform strongly. Overall, IBISWorld reports that auto parts stores have been growing at a compound annual growth rate (CAGR) of 2.0%. While the industry saw steep revenue declines during the pandemic, easing social distancing measures has allowed profits to increase once again.
The market size of dollar and variety stores in the U.S., measured by revenue, was $112.3 billion in 2022. This figure represents a year-over-year growth rate of 1.3%, part of an average annual growth rate of 3.9% since 2017. With the U.S. poverty rate continuing to rise and per capita disposable income also decreasing as a result of inflation, dollar stores are expected to continue growing their market share. In fact, the market size of this sub-sector has increased faster than that of the retail trade sector overall, according to IBISworld.
In 2021, pharmacy and drug store sales increased to an all-time high of $324.61 billion, according to Statista. In 2022, IBISWorld measured the market size of the industry by revenue, yielding a value of $553.9 billion. That figure represents growth of 2.2% year over year. On average for the past five years, the industry has grown by 3.5% each year. While it is a competitive industry with high competition between a few dominant players, the pharmacy and drug store sector is typically considered recession-resistant and generally experiences low levels of revenue volatility. The sector was ranked the 6th largest industry within the retail and trade group by market size, and was the 25th largest sector in the U.S. as a whole.
Quick Service Restaurants
Custom Market Insights has reported that the fast food and quick service restaurant (QSR) industry was estimated at $267.1 billion in 2021. By 2030, that number is expected to grow to $410.1 billion, representing a CAGR of 5.8%. The industry is highly competitive and crowded, dominated by a few major players, with McDonald's continuing to hold the coveted top spot. Starbucks, Chick-fil-A, and Taco Bell (part of the Yum! Brands group, which also includes Pizza Hut and Kentucky Fried Chicken) follow close behind.
What does STNL mean?
STNL stands for single tenant net lease. It refers to a type of commercial real estate investment that involves a property that houses only one tenant. STNLs come with many benefits for commercial real estate investors, including reduced landlord liabilities and easier rent collection and risk management.
What are STNL properties?
STNL properties are buildings or lots, typically owned by commercial real estate investors, that are rented out to a single tenant. STNL stands for "single tenant net lease." Net leases involve tenants paying one or all of the following: property taxes, insurance premiums, and maintenance costs.