FEATURE ARTICLE, DECEMBER 2008

LOOKING FOR A MORE SECURE INVESTMENT?
High-quality, single-tenant, triple net leased investment properties are providing stability in an unstable market.
Paula Danker

Danker

With the downturn in the economy and recent collapse of the stock market, massive financial losses have caused many investors to pull money out of the stock market and search for a secure place to invest. Security has become a fundamental consideration when assessing future investments. As a result, the demand for high-quality, single-tenant, triple net leased investment properties has risen.

With single-tenant, triple net leased investment properties, an investor purchases the land and building with an existing tenant in place. In many cases, investors can purchase assets tenanted by large, publicly traded companies on 15- to 20-year initial lease terms with renewal options. It is common for the tenant to be on the property for up to 40 years before a new lease needs to be negotiated. Single-tenant, triple net leased investment properties can be acquired with credit companies, such as Jack-In-The-Box, Inc., CVS/pharmacy, Walgreens, Rite Aid, Burger King, Arby’s, Wendy’s, McDonalds and AutoZone, to name a few. 

The most secure types of assets in this product type are the corporate-backed, triple-net sites. By having a large, publicly traded company as a tenant, investors can be assured that no maintenance or management responsibilities will be subject to the owner. These responsibilities, as well as the obligation to pay all property taxes, are handled by the tenant. For example, Jack-In-The-Box is a publicly traded company that I work closely with on many deals in Texas. Because of the company’s stability and the fact it has been in existence since 1951, investors can feel secure about having Jack-In-The-Box as a tenant on a long-term lease. All of the clients I have worked with on Jack in the Box net leased investment properties have been very happy with the security that comes from leasing to a large, high-quality corporate entity, as well as knowing all the management, maintenance and tax issues are being handled by the tenant.

Along with the security these investments offer, single-tenant, triple net leased investment properties also offer solid investment returns to investors. Because of the tax advantages of leverage and depreciation, these assets offer attractive annual returns in the 7 to 9 percent range.

The biggest benefit an investment broker can offer investors in the search for one of these properties is consultative services to clients that assist them in analyzing their overall investment portfolios, as well as analyze individual transactions. Any investor seriously looking at these types of investments should not make a purchase decision without understanding the overall picture of how the investment will affect their estate planning strategies. Top investment brokers consult with the investor’s CPA or estate planner to determine the right strategy for each scenario. Part of this strategy includes performing an investment proforma analysis that shows the details of the investment, including down payments, financing and depreciation, and before and after tax returns. In addition to working with a professional that understands the numbers, investors should work with professionals that have a network of portfolio managers, developers and corporate contacts so they can obtain properties that are not available on the open market. This allows the investor to qualify a property without having to compete with others for the same investment opportunity.

Triple net leased investments provide greater security and less risk to investors than alternative real estate investments, such as residential income properties and multi-tenant retail centers. For example, residential income properties typically are leased for shorter terms, such as 1-year or on a month-to-month basis. When the tenant moves out, the owner is responsible for expensive maintenance costs such as repainting the premises, steam cleaning carpets and repairing any damage that was done while the tenant occupied the property. All of these expenses deduct from the return on the investment. In addition to these costs, the owner has to re-lease the property and may have many months with no tenant in place, forcing the owner to cover the monthly mortgage payment. From an investment standpoint, unless there is huge upside potential in the value of the asset from year to year, residential income properties typically offer low annual returns in the 3- to 4-percent range.

Multi-tenant retail centers also are more risky than single-tenant, triple net leased investment properties. Multi-tenant retail centers are very management- and maintenance-intensive, and owners have to deal with vacancies on a more frequent basis, since typical lease terms are 3 to 5 years. As tenants move out, monthly income fluctuates, and in today’s difficult economic times, many small “mom-and-pop” retail uses are going out of business and leaving landlords with much higher vacancies than expected.

From the lending perspective, the recent credit crunch and ensuing economic crisis have tightened lending for many types of investment properties. However, lenders are still attracted to financing single-tenant, triple net leased investment properties that are well-located, supported by strong demographics and backed by large credit companies. In most cases, a down payment of 40 to 45 percent of the total consideration is required to finance these deals.

The Texas economy has remained relatively strong compared to the national outlook. Many companies and families continue to move to the region due to the favorable cost of living and relatively low taxes found in the state. In addition, many California investors are finding better returns in the Texas market and continue to look to this great state for investment opportunities. Texas will remain a strong investment market for many years to come.

Because of the current difficult financial times and the uncertainty of the future, investors that want to reduce risk; add a stable, income-producing asset to their portfolios; increase long-term security; and have more peace of mind should consider investing in single-tenant, triple net leased properties.

Paula Danker is senior vice president, Investment Division, for Voit Commercial Brokerage.

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