This past year, at the Annual North American Development Group (NADG) Investor Meeting, a reoccurring theme emerged. While many of the longtime investors were accustomed to higher, more entrepreneurial returns from NADG, they now also desired a safer, more secure investment opportunity to place cash savings that currently were earning meager returns. Most of these were accredited investors, individual investors, as opposed to larger institutional funds. More specifically, they wanted these 3 things:
1. Safe and Secure Investments
2. Consistent and Growing Cash Flow to protect against future inflation
3. A Liquidity Option Just Because…things happen and flexibility is valuable.
As a response, NADG created an investment vehicle, structured as a private REIT, to invest in income producing, triple net leased, freestanding retail properties leased predominately to one tenant. This asset class provides several attractive features for individual investors who want to invest in real estate but want to avoid the time-intensive headaches associated with having to manage a property.
3 Things to look for in a Single Tenant NNN Investment
- Large, liquid asset class: estimated at $2 trillion in asset value with a large pool of buyers/sellers
- Secure investment class: historical occupancy rates for single tenant net lease retail properties typically exceed 95%
- Proven Retailers: most well located, single tenant retail properties are leased to proven national or regional operators with a large number of units, and strong credit
- Passive Investment: A majority of properties are actual “triple net leases” where the tenant is responsible for ongoing operating expenses as well as capital repairs. This requires minimal ongoing obligations for the property owner.
- Long term, growing income stream: new lease terms range, on average, from 10-20 years, and many feature contractual rent escalations.
- Prime Real Estate: the best single tenant properties are “out parcels”, situated in front of a larger shopping center, with high visibility and quick, easy access. The out parcel is the most desirable piece of the shopping center, as increased visibility further builds brands.
- Tax Deferred Exchange: Single-tenant retail properties serve as attractive investment opportunities for Like-Kind Exchanges Under IRC Code Section 1031 which allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange.
The asset class also can pose serious challenges for those who do not properly analyze a potential subject property. A few key things to look out for when considering an investment:
- Analyze the Rent Amount. Make sure to compare the current rent paid to the specific surrounding submarket. If the tenant is paying above market, not only will you pay too much for the property, it’s likely the tenant will ask for a rent reduction at the end of the term. This negatively impacts both the rent income you receive and the value of the property.
- Analyze the Surrounding Area. Retailers like to be near one another to form vibrant retail nodes, normally with a few large anchors such as a full-service grocery store, Walmart Supercenter, Costco, Home Depot, etc. Concentration increases traffic, visibility, access to customers, and boosts revenue. If a retail property is outside of this concentration, it’s important that the property benefits from other factors such as traffic counts, other types of anchors like hotels or office properties. Otherwise, there is a good chance that the retailer relocates to become part of the nearest retail node.’
- As an investor/purchaser, hire an experienced real estate attorney. Single tenant properties carry many of the same investment risks as other types of real estate. Whether it be an unfavorable lease agreement that provides weak covenants for the landlord, or various use restrictions for the property limiting the type of tenant – things come up during an inspection period that may cause one to seriously question or back out of a deal. It is important to note that most single tenant properties that are on the market come with existing leases, so you are beholden to what the current or a prior landlord agreed to with the tenant.