This article was written by our very own Noah Shaffer. Please visit here to learn more about Noah and the rest of the 3 Properties team.
Real estate has varying levels of ownership responsibilities ranging from management intensive gross leases for “mom and pop” tenants, to ground leases for national tenants.
The attraction of net lease properties.
The commercial real estate industry has become an attractive investment class over the past 5 years as investors continuously search for yield. Most investors are not prepared to handle the day-to-day management responsibilities of an office building or retail strip center with gross leases, so they turn to the net lease industry.
Net lease real estate is attractive to investors because of its seemingly “bond-like” nature and the creditworthiness of asset tenants like Starbucks, 7 Eleven, and Walgreens.
Net lease properties aren’t actually passive.
The reality is that net lease assets require a focused and experienced real estate professional to ensure that the asset provides the yield required by the investor over the property’s life cycle.
There are three true subsets of the “Net” lease industry: 1) ground lease, 2) absolute net lease, and 3) double net lease properties.
Common portfolio strategy and property management requirements for all of the aforementioned lease structures include bookkeeping, rent collection, ongoing property inspections, tenant communication, assurance of lease adherence, market analysis and monitoring, and document organization.
The management responsibilities of double net lease properties are significantly greater than ground leases and absolute net leases. Starbucks and other tenants with double net lease structures require landlords to complete annual expense reconciliations, manage their own tax payments, and maintain the roof, structure, and common areas of the property.
Landlords who put in the proper time, or hire a commercial real estate property management firm like Confidant Asset Management, to focus on each of these aspects from the date of acquisition will help ensure that their investment is properly managed.
Landlords of net lease properties should maintain proper reserves for future vacancies or expenses to be comfortably prepared for any potential pitfalls during their ownership of the property.
The most important aspect of single tenant net lease ownership is the constant monitoring of the tenant and guarantor’s real estate strategy and corporate fiscal strength.
The changing landscape and importance of monitoring investments.
The commercial real estate industry is changing rapidly, and real estate investors may be left trying to replace Starbucks’ $95/SF with local tenants paying $30/SF. A situation like this may result in a significant loss in a property’s value and potential default on any outstanding mortgages.
In short, net lease investors ultimately must allocate a significant portion of time to monitoring their net lease asset to ensure that the property provides the required yield.