Demand for single net-leased assets has increased substantially over the last few years. In 2021, net lease transactions hit the $79.3b mark, and the trend is expected to continue through 2022. Single net leases offer investors better continuity in terms of returns compared to other lease types.
This is because tenants are responsible for paying maintenance, property taxes, and rent. For owners, this means lower costs and reduced risk. However, single-tenant leases have some disadvantages you must be aware of before investing.
In this blog, we bring you an analysis of the relative advantages and disadvantages of single net leases:
Advantages of Single Net Leases
One of the biggest positives of investing in single-net leases is that they are passive investments. In a single net lease, the tenant is responsible for paying the bulk of the expenses relating to insurance, taxes, maintenance, and repairs – expenses otherwise paid by the property owner.
On the other hand, the property owner only pays for other incidentals not included in the lease agreement. So what are some other reasons to invest in single net leases?
If you have been worried about the increasing rate of tenant evictions lately, single-net leases are for you. Most single-net tenants are enterprise businesses with nationwide operations, for example, retail chains, distribution and service centers, etc. This reduces the possibility of default and increases the likelihood of steady returns over the long term. Even if the property owner sold out, the lease would remain in effect.
With a single net lease, property owners are insulated from sudden increases in taxes or insurance – after all, the tenant bears the burden of paying for maintenance, utilities, and other costs. A rent escalation clause is standard practice in single net leases, allowing automatic annual increases. All of these factors make single net leases attractive for investors.
Disadvantages of Single Net Leases
As with all investments, single net leases have their fair share of downsides. It can take time and money for you to find a replacement tenant if the incumbent chooses not to renew. You may also have to undertake extensive improvements to meet the specific requirements of a new tenant.
Marketing costs are a plus. However, it may be possible to transfer at least some of these costs to the tenant. You must work with a commercial leasing consultant to learn how to offload some of these costs.
In a single net lease, the actual rent is much lower, given that the tenant also pays for other operating expenses. So while maintenance and other overheads may be lower for the owner, the returns are also on the lower side. In addition, the owner is liable for any accidents on the property. Finally, not everybody can invest in premium single-net leased properties because of the huge financial commitment required.
Last Words
Like all investments, due diligence is critical to picking the right offering. In addition o reading the private placement memorandum and other key documents, it is also important that you talk to your financial advisor before signing up.
True North offers strategic insights and expertise to individuals and institutions in optimizing their investments for the best returns. For more information, contact our team today!
