An Overview for Section 1031 Exchanges
“No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.”
Single Tenant, Net-Leased Properties (“STNL”)
In an uncertain market, many investors are looking to place or diversify their money into a more stable, predictable investment. Other investors are looking for a more suitable investment to match their investment objectives or to find a “Replacement Property” to complete a 1031 tax-deferred exchange. One of the better choices is to invest in single-tenant, net-leased properties.
STNL properties are one of the most sought-after property types for investors. These properties are appealing to a wide variety of buyers, from individual investors, to private equity partnerships, to large institutional investors. STNL properties are particularly attractive to investors performing a 1031 Tax-Deferred Exchange and for those investors of real estate looking for a more passive real estate investment.
Here’s what you need to know about investing in STNL properties:
Single Tenant Building
STNL properties are typically freestanding office, retail, or industrial buildings that are leased and occupied by a single tenant. Typically, the tenant has committed to a long-term lease with fixed rent increases over the lease term.
A tenant with a “Net Lease” is responsible for paying not only rent but also some or all of the operating expenses associated with the building such as common area maintenance, taxes and insurance. The two most common net lease structures are referred to as:
- Triple-Net or “NNN” typically describes a Lease in which the Tenant agrees to pay all of the building’s operating expenses: Common Area Maintenance (“CAM”), Taxes and Insurance as well as all structural repairs of the building.
- Double-Net or “NN” typically describes a Lease in which the Tenant agrees to pay for Common Area Maintenance (“CAM”), Taxes and Insurance however the Landlord is typically responsible for the repair of any structural issues related to the building such as roofs, foundation and supporting walls.
Benefits of STNL Properties
- Stable, Predictable Income – Many people consider Single-Tenant Net-Leased properties to be a bond-like investment because of their stable, predictable returns. As the owner, you know exactly who the tenant is, how long they will be leasing the real estate and exactly how much rent they pay. This means you can predict a steady income stream from your investment, regardless of changes in the overall economy or real estate market.
- Passive Management – Many Net-Lease investors are seeking investment property that requires less active management and maintenance. STNL properties are considered the most passive real estate investments. Many multi-family owners, frustrated with the responsibilities of daily active management, will sell their properties and reinvest the sale proceeds into STNL properties.
- Customization & Diversification – Single-Tenant Net-Leased investments can be custom tailored to an investor’s risk-reward expectation by choosing buildings of varying tenant credit, lease terms, industries and geographic locations.
Risk vs Return
Simply put, the better the credit quality of the Tenant and the longer the lease term remaining, the lower the risk of the investment and the lower the return. In fact, many investors view investment-grade, STNL property as a comparable alternative to bonds; an investment that produces a steady, predictable return on investment with limited exposure to risk. Depending on your investment goals, an STNL investor can also invest in non-investment grade tenants and/or shorter lease terms. Investment in these types of properties would offer a higher degree of risk but also offer a higher return on investment, plus the additional potential for upside through asset appreciation.
Pricing & Valuation
A Single-Tenant, Net-Leased property’s value is determined by a combination of factors including:
- The credit of the tenant
- The amount of lease term remaining
- The current rental rate (and future rent escalations if applicable)
- The location of the real estate
- The physical condition of the property