Why Invest In a Credit Tenant Property?
Stable tenants, high occupancy rates, and minimal maintenance are three key reasons commercial real estate investors are attracted to credit tenant property. As questions continue about the state of the economy and the growing rate of inflation, properties with brand-name credit tenants can provide long-term income streams with minimal risk.
What is a National Credit Tenant?
A national credit tenant, also known as a brand-name tenant, is one with an investment-grade rating based on size and financial strength from major credit rating agencies such as Moody’s and Standard & Poor’s. Examples of credit tenants include:
- CVS Drug Stores
- Dollar Tree
- Motel 6
Credit Tenants and NNN Leases
Buyers can find a credit tenant as triple net lease properties for sale. Net lease properties for sale are often single-tenant or big box retail property for sale with an anchor tenant on a NNN lease.
What is a NNN lease?
Each ‘N’ in a triple net lease means “net of” or “excluding.” In other words, the monthly rent paid by a brand-name tenant is net of three major operating expenses:
- Property taxes
- Building insurance
- Maintenance and ongoing expenses of the building
Benefits of a NNN lease
In addition to paying a base rent, a triple net tenant also pays for the above expenses, which is why NNN commercial property for sale is often thought of as a “coupon clipper” investment:
Cash flow is steady and predictable with longer-term NNN leases. They require minimal management since the tenant is responsible for maintenance and repairs. The brand recognition of one NNN tenant often positively impacts leasing and occupancy for multi-tenant properties due to increased traffic. And, often, financing is easier and offers better terms, creating significant savings over the loan term.
Example assets with NNN leases
- A Walgreens NNN lease for sale
- A car wash self- or full-service
- An oil & lube or auto repair facility
- A Motel 6 for sale
- Grocery and home improvements stores
- Fast food restaurants such as McDonald’s, KFC, or Wendy’s
- Standalone retail for sale such as a Verizon store or dental franchise
- Businesses for sale such as a private school or veterinary clinic
- A Family Dollar or Dollar General
NNN Tenants Are Resilient
A recent article from Avison Young noted that triple net lease investments might be one of the smartest moves an investor can make.
Properties with NNN tenants are seeing more inquiries because of their historical stability and resilience in turbulent times. Triple-net retail storefronts for sale are in high demand, as are industrial NNN properties serving the e-commerce supply chain.
Essential assets in times of uncertainty
- Steady income which is especially attractive in the current low-interest rate environment
- Similar to a bond wrapped in real estate due to the no-fuss operating models
- High-quality tenants on long-term 10- or 15-year net leases
- Low turnover rate with higher occupancy levels for multi-tenant projects
- Well-positioned to maintain or increase in value over the long term
Even during the pandemic and recession, branded tenants on net leases mostly stayed and renegotiated their leases, unlike many regional and local under-capitalized leaseholders.
Investors and Lenders Like National Credit Tenant Leases
Net lease transaction volume exceeded $90 billion in 2021, due to a growing amount of investment capital seeking stable yields. Sales of net leased properties are expected to remain robust in 2022, with assets in primary markets with long-term leases to investment grade tenants commanding the lowest cap rates.
Net lease assets with investment-grade, well-known publicly-held tenants generate predictable income streams over the long term. As a result, risk premiums are narrower, and debt is more readily available.
Although lenders have been tightening standards, plenty of private capital is flowing into single-tenant net lease properties as investors seek to smooth out volatility and increase predictable portfolio performance.
REITs and DSTs
Larger assets like Home Depot or Walgreens can also be perfect additions to a real estate investment trust (REIT) or a Delaware Statutory Trust (DST). A REIT is a company that owns and operates income-producing properties in different asset classes, while a DST is an entity that holds title to investment real estate.
For example, both REITs and DSTs can and do invest in office buildings, retail complexes, industrial and distribution facilities, healthcare such as freestanding urgent care facilities, and infrastructure such as cell phone towers.
These ownership models for branded tenant-leased property can be used to diversify investment holdings by asset class, geographically, and for 1031 tax-deferred exchanges.
Credit Tenant Lease Property Easier to Sell
Investors looking for passive income opportunities that are easy to sell (when the time is right) also consider branded tenant-lease property an ideal investment.
Because lenders view net-leased property as lower risk, they are easier for prospective buyers to obtain financing. Properties leased to credit tenants are attractive for the replacement side of a 1031 exchange. NNN property can also make the ideal sale lease-back vehicle for tenants such as Walgreens, Dollar General, or Walmart.
Not all branded tenant-lease property is the same. Key features to look for in a triple net lease property include:
- Credit vs. non-credit tenant
- Longer lease terms make the investment more attractive, with longer cash flows creating a higher likelihood of obtaining financing.
- Area demographics, traffic patterns, and neighboring commercial properties also affect the type of net-leased tenant that will offer the most potential for long-term success.
- Buildings with unique sizes or shapes may be difficult to re-let if the lease contains an early termination clause, while big-box stores can be more easily converted to accommodate new tenants.
Investing in a national credit tenant property can offer significant advantages. Credit tenants provide investors with a stable and secure income stream, a hands-off business model, impress lenders and future buyers, a potentially better bottom line, and a more valuable commercial real estate property.