FAQs
What is a net lease property?
A net lease is a commercial real estate lease where the tenant is responsible for paying some or all property expenses, such as taxes, insurance, and maintenance, in addition to rent. In a triple net (NNN) lease, the tenant covers all these costs, making it a low-maintenance investment for landlords.
What are the different types of net leases?
- Single Net (N): Tenant pays rent and property taxes.
- Double Net (NN): Tenant pays rent, property taxes, and insurance.
- Triple Net (NNN): Tenant pays rent, taxes, insurance, and maintenance.
- Absolute NNN: Tenant covers all costs, including structural repairs and roof.
- Bondable Lease: Similar to NNN, but with no landlord responsibilities and often longer terms.
What are the benefits of investing in net lease properties?
- Stable Income: Long-term leases (10-25 years) with creditworthy tenants provide predictable cash flow.
- Low Management: Tenants handle most property expenses, reducing landlord responsibilities.
- Appreciation Potential: Properties in prime locations can increase in value.
- Inflation Protection: Many leases include rent escalations tied to inflation or fixed increases.
What are the risks associated with net lease properties?
- Tenant Credit Risk: If the tenant defaults or goes bankrupt, income stops.
- Vacancy Risk: Single-tenant properties can be hard to re-lease if the tenant leaves.
- Market Risk: Property value may decline in weaker markets or if the tenant’s business model falters.
- Limited Control: Landlords have less control over property maintenance and operations.
Who typically invests in net lease properties?
Investors include high-net-worth individuals, real estate investment trusts (REITs), institutional investors, and those seeking passive income through 1031 exchanges. They appeal to investors looking for stable returns with minimal management.
What types of tenants are common in net lease properties?
Common tenants include national chains like CVS, 7-Eleven, Starbucks, Dollar General, and fast-food restaurants (e.g., McDonald’s, Taco Bell). These are often investment- grade tenants with strong credit ratings.
How do cap rates work in net lease investments?
The capitalization rate (cap rate) is the annual net operating income (NOI) divided by the property’s purchase price. For example, a $1M property with $70,000 NOI has a 7% cap rate. Lower cap rates (e.g., 5-6%) indicate safer investments with strong tenants, while higher cap rates (e.g., 8-10%) suggest higher risk. The simple way to think of a cap rate is your unleveraged return.
What is a 1031 exchange, and how does it relate to net lease properties?
A 1031 exchange allows investors to defer capital gains taxes by reinvesting proceeds from a property sale into a like-kind property. Net lease properties are popular for 1031 exchanges due to their stable income and ease of management.
How long are typical net lease terms?
Lease terms typically range from 10 to 25 years, with options for renewal. Ground leases may extend to 50-99 years, especially for absolute NNN leases.
What happens if a tenant vacates a net lease property?
If a tenant vacates, the landlord must find a new tenant or sell the property. This can be challenging for single-tenant properties, especially if the location or building is specialized. A strong lease with a creditworthy tenant mitigates this risk.
How do I evaluate a net lease property?
- Tenant Creditworthiness: Check the tenant’s financial stability (e.g., S&P or Moody’s ratings).
- Lease Terms: Review lease length, rent escalations, and landlord responsibilities.
- Location: Assess the property’s market, accessibility, and growth potential.
- Cap Rate: Compare to similar properties to gauge value.
- Property Condition: Ensure the building is in good shape to avoid unexpected costs.
What is the difference between a net lease and a gross lease?
In a gross lease, the landlord pays most property expenses (taxes, insurance, maintenance), while in a net lease, the tenant assumes some or all of these costs. Net leases shift more financial responsibility to the tenant.
How do rent escalations work in net leases?
Rent escalations are built into the lease to increase rent periodically, typically by a fixed percentage (e.g., 10% every 5 years,etc) or tied to an index like the Consumer Price Index (CPI). This helps protect against inflation.
Can net lease properties be financed?
Yes, investors often use commercial mortgages or leverage 1031 exchange proceeds. Lenders favor net lease properties with strong tenants due to their stable cash flow.
Are Net Lease Properties Good for 1031 Exchanges?
Yes, they are popular replacement properties for 1031 exchanges due to passive ownership and stable income.
How Important Is Location in Net Lease Investing?
- Critical for long-term viability, even with strong tenants.
- Key factors: traffic counts, population density, visibility, and co-tenancy (near other strong retailers).
Are Net Lease Properties Recession-Resistant?
- Some tenants (e.g., discount retailers, medical, fast food) perform better in downturns.
- Creditworthy tenants reduce default risk.
How Do I Find Net Lease Properties for Sale?
Leading net lease brokerage firms such as The Boulder Group typically offer a large inventory of both on- and off-market net lease properties for sale.
What sets The Boulder Group apart from other net lease brokerage firms?
The Boulder Group is the leading boutique net lease brokerage firm in the United States by transaction volume. The firm is known for its single-tenant specialization, data-driven approach, strong individual and institutional relationships, and its reputation for integrity.