Investing in a Single Tenant NNN Property vs. Multi-Tenant NNN Property?

As the name implies, a Single Tenant NNN property is leased to one single business entity on the basis of a long term lease. On the other hand, multi-tenant properties like shopping malls or centers offer multiple spaces for different commercial purposes to different businesses. In commercial real estate, Single Tenant NNN Lease Properties are getting more popular amongst investors versus Multi-Tenant properties. It is important to note that most Single Tenant NNN properties that are on the market come with existing leases, so you are beholden to what the current or a prior landlord agreed to with the tenant.

There are many reasons for choosing a Single Tenant NNN lease property over a Multi-Tenant NNN Lease Property:

Certainty of cash flow

Typically, a Single Tenant NNN property lease ranges from 10 to 25 years. Therefore, a NNN Lease Landlord or investor receives a predictable rental income from the single tenant for a long time, given that the underlying tenant business has good predictability of cash flow. Even when compared to other real estate investments, the cash flow is more predictable in NNN properties, this is because the rental rates rely on a long term lease agreement and the tenant pays for all the operating costs of the property. On the other hand, a multi-tenant NNN property has component leases that only last between 1 to 7 years. Thus, a Multi-Tenant NNN lease landlord or investor has to advertise more often and find tenants to fill vacancies, in addition to offering new rent abatements, build-out concessions and bearing “lost rent” for downtimes between tenants.   In addition, the landlord or NNN property investor also must negotiate with multiple tenants that possess differing risk profiles.

Maintenance

Another significant advantage of owning a Single Tenant NNN lease property is the lack of shared common areas and therefore lowered landlord responsibilities.  This is important because the landlord must maintain the property’s common areas, regardless of who bears the financial burden for that work under the tenants’ leases.  Common areas may include trash areas, hallways, courtyards and lawns. Maintenance responsibilities may be relatively simple, such as lighting and sweeping or shoveling/salting a common sidewalk in front of a property, or they may be more complicated in nature. The more tenants residing at the property, and the more amenities offered there, the more complex and potentially costly and time-intensive these obligations may become, especially costs related to parking lots, lobbies and amenity spaces. 

Tenancy Risk

This factor is closely tied to predictability of cash flow from the NNN leased property.  If a property is Single Tenant NNN lease, the success of the investment is dependent on that tenant’s prompt payment and diligent performance under its only lease. Plus, investment risk can be mitigated by ascertaining the tenant’s credit before purchasing a leased property or entering into a new lease. It can also be mitigated by securing a lease guaranty collaterized from another source such as the tenant’s parent company. A security deposit may also be negotiated. Advance preparation for lease expiration is critical for a single-tenant NNN property, especially if there is a mortgage on the property, as the loss of rental income can trigger a loan default. Commercial tenants frequently make leasing decisions on their own corporate timeline rather than the landlord’s. Further, tenants often request lease concessions before committing to renew. When evaluating these requests, the investor should consider the strength of the overall market and economy, as well as the time and cost of finding a new replacement tenant if owner and tenant are unable to reach an agreement with the current lessee.  

In the case of a Multi-Tenant NNN lease property, if the property’s rental units differ in size or vary in features, a tenant’s ever-changing needs may be met by relocating them within the property, rather than having to make significant capital improvements to their space or losing them as a tenant entirely. Further, lease expirations may be staggered, thereby minimizing the risk of vacancies. As each space in the property comes up for re-leasing, the parties have the opportunity to adjust rental rates in accordance with the current market.

Exit Strategies

Savvy investors will consider when and how they will be able to exit an investment before buying the property. As noted above, if there is only one tenant, the property will either be fully occupied or completely vacant. The sale price will be higher if there is a quality tenant in place.

Single-tenant NNN properties have a few logical points of exit:

• concurrently with lease expiration,
• shortly after the tenant’s term is renewed (or a new lease is executed), or
• a financeable amount of remnant term (5, 7 or 10 years).

Selling at another time may be possible, but doing so may be less profitable because the buyer will need to bear the risk of re-tenanting the property and/or the expense of tenant improvements for a new lease. Additionally, if there is a mortgage on the property, there may be significant prepayment penalties if the property is sold prior to loan maturity.

Multi-tenant properties are less likely to be vacant at any given point in time.  They, therefore, have greater flexibility in the timing of an exit, so long as all or most of the leases do not expire concurrently.   The execution of a new lease with one or more significant “anchor” tenants, or positive developments in the commercial real estate market, such as the opening of a new demand driver for the property, may also provide a good opportunity to sell.

ADDITIONAL CONSIDERATIONS

• Multi-tenant NNN properties require the investor to manage the property, etc. If the investor opts to hire a property management company to perform these tasks, such costs must be considered.
• Multi-tenant NNN leases require major structural maintenance and replacement costs and these will fall on the investor to cover. E.g. the roof, electrical systems, heat and air conditioning, and plumbing, all big dollar costs.
• Lenders may be more reluctant to provide financing for multi-tenant real estate investments because such NNN leases are typically shorter than Single Tenant real estate leases. Tenants are often less creditworthy than single tenants and have a higher turnover. These factors increase the risk factor for a lender and as a result, a lender may charge higher interest rates as compared to financing a single tenant real estate investment.

Commercial real estate provides NNN triple net lease investors amazing opportunity. At the Triple Net Investment Group, we have brokers, specialists and experts that focus exclusively on NNN net lease investment property. We welcome you to contact us and speak with one of our specialists to learn more how we can help you evaluate, negotiate, acquire, close and 1031 exchange out a NNN investment property in all states of the Union.