Single Tenant Net Lease (STNL) Property: Pros, Cons, and Considerations
What is a single-tenant net-lease property?
Also known as a triple net (NNN) property, a STNL is a property that is leased to a single tenant and gives the vast majority of property responsibilities to the tenant. They are responsible for paying operating expenses, insurance, and taxes. This type of rental property listing is most common for small business locations like retail stores and restaurants, but it can be industrial or even residential as well. STNLs often seem attractive to new investors because the landlord remains very “hands off”, however there are still risks involved with this kind of investment.
Benefits of STNL
The major advantages of an STNL property include:
- A long lease term: These properties will typically rent to one tenant for up to 10 or even 25 years with a single lease. A long-term lease can be attractive because it offers financial security. It also relieves the hassle of leasing the property over and over again. Typically, tenants tend to treat long-term lease properties with more care since they will be renting for many years.
- Built-in lease escalator: Long-term leases will often have built-in annual rent increases to account for market appreciation.
- Full occupancy: A single-tenant property is either occupied or vacant. While this fact can also be a risk, it offers some security and stability because the property is always generating full income while it is occupied. This also reduces the workload of getting the property rented, including showings, tenant screenings, and property photography.
Risks and Limitations of STNL
While only having a single tenant offers financial benefits, there are two sides to this coin. STNL properties have their risks:
- Vacancy: As stated before, this type of real estate property is either occupied, or it is not, which is both a virtue and a curse. The profitability of the property relies completely on whether or not it is being rented. When the tenant vacates, the property loses all income generation and the operating expenses and taxes still need to be paid. All at once, the property goes from a source of income to a monthly cost, which is a serious danger if the investor is not financially stable. This makes STNL properties a high-risk investment – unexpected things happen, and the tenant can break the lease in emergency situations, or they may need to be evicted.
- Specialized buildings: Some STNL properties have alterations or designs made specifically for the current tenant. It is essential to recognize any specializations on the property, because this can make re-leasing more difficult if the building has features that are not generalizable or attractive to a wide audience. You may have to do major construction or alterations when the tenant vacates. Specialized buildings have increased investment risk, but that typically lowers the asking price.
If you’re looking into STNL properties, there are many factors to keep in mind:
- The tenant selection process is critical: It is extremely important that you choose a tenant that will be reliable and trustworthy since they will be leasing for an extended time, and the entire property income depends on them.
- These properties are often bought and sold within the lease term: This means that the tenant (or lack thereof) comes with the property and plays an important role in the property value.
- The landlord may have some financial responsibility: Not all STNL properties put all of the responsibility on the tenant. Often times the landlord will still have structural responsibility in terms of the building’s construction itself. Each individual lease will outline the responsibility distribution for that specific property.
- STNL properties typically trade based on capitalization rate: Cap rate is the property income divided by the asking price, or the percentage of the investment that you will make back each month from the property income. High-risk investments typically sell for a higher cap rate, and the cap rate is strongly influenced by the current tenant rating, or the lack of a tenant altogether.
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