What Are Investment Grade, Long-Term Net-Leased Properties?
Benefits of Investment Grade, Long-Term Net-Leases
Drawbacks of Investment Grade, Long-Term Net-Leases
Other Considerations of Long-Term Net-Leases
Our portfolios combine numerous investment-grade, long-term net-leased residential or commercial properties and are structured to receive 1031 and 1033 exchanges.

Due to the current property market conditions, we believe that investment grade, long-lasting net-leased property is appropriate to offer stabilized earnings in the middle of prospective continuous financial turbulence. Caution is required however, as many financial investment grade tenanted residential or commercial properties in the net-leased area have actually seen their worths rebound back to levels not seen since prior to the start of the Great Recession.

What Are Investment Grade, Long-Term Net-Leases?

"Investment-grade, long-term net-leases" refers to the primary elements of a particular lease structure. "Investment-grade" describes the qualities of the renter with which the lease is made. "Long-term" refers to the general length of the lease, and "net-leases" refers to the structure of the lease commitments.

Investment-Grade:

Investment-grade leases are leases to occupants that keep a credit score of BBB − or higher. This financial investment score is offered by S&P's, Moody's, or Fitch, and it represents a company's capability to repay its obligations. BBB − represents a "great credit rating" according to the rating agencies. Typically, just larger, nationwide companies keep these more powerful credit rankings.

Regional tenants and franchises are too small for the ranking companies to track. Therefore, in most cases, it is suggested that your lease is corporate-backed-- backed by the parent business and not just a regional franchisee. There is a really big distinction in between the credit and strength of a local McDonald's franchise owner and the McDonald's Corporation.

The business parent generally will provide higher rent stability in the middle of financial downturns. Rent stability likewise equates into greater stability for the value and rate of your genuine estate. The cost of your asset is straight connected to the earnings it produces and the likelihood of that income continuing for a future purchaser. Find out more about business credit rankings here.

Long-term:

Typically, "long-term" explains a fixed-length obligation in lease term at or beyond ten years. Some brokers or consultants might consist of lease options as a part of the repaired lease term. It is important to compare the options and commitments. If the tenant has the option to restore for 5 more years after an initial 5-year term, the lease term need to be thought about a 5-year lease with another 5 years in alternatives-- not a 10-year lease.

Find out lease terms and for how long the tenant is obligated to pay. It makes all the distinction when considering your threat, returns, capability to get financing, and your ultimate capability to resell the residential or commercial property for an earnings.

Net-Leases:

Double-Net ("NN") and Triple-Net (or "NNN") leases are leases whereby the occupant is accountable for all business expenses, consisting of taxes, insurance, the structure, and the roofing. A pure NNN lease that will cover these expenses throughout the term of the lease is often referred to as an "absolute NNN lease." Some leases are called "triple web" that do not include the expenditures of the roof or structure of a building.

These kinds of leases are more precisely referred to as "modified NNN" or "double-net" ("NN") leases.

It is crucial to separate lease types when thinking about financial investment residential or commercial property. Many brokers describe both pure triple-net and modified double-net leases as the same kind of lease. There is a huge difference!

Roof and structure repair work can be really pricey and might offer your occupant an early out for their lease responsibilities if the structure is not maintained correctly. On the other hand, if you get a double-net residential or commercial property with proper guarantees, you might be able to get a materially greater earnings than you would with an absolute triple-net.

If the property manager should have absolutely no possible management problems whatsoever, it is generally best to invest in pure triple-net (NNN) leases, leaving all of the operating and structural costs to the renter. If the management is ready to bear some potential management issues, modified NNN and double-net leases can be appropriate if the structure and roofing are relatively new and if they come with significant, long-term guarantees of quality and maintenance from the original setup business or developer.

The increase in earnings investors might enjoy with double-net over triple-net leased assets will normally more than spend for the expense of any possible management problems that might develop. Check out how to examine double-net and triple-net lease terms now.

Benefits of Investment-Grade, Long-Term Net-Leases

Stability:

Investment-grade, long-term net-leases can supply stability of income and value to investors in spite of challenging economic situations. The lease payments usually are backed by a few of the country's strongest corporations. Whereas smaller sized, regional renters (or perhaps people in house properties) might struggle to make rent payments, big, successful, and well-capitalized business are often in a better position to preserve their responsibilities regardless of the economy's twists and turns.

A strong renter connected to a long-term lease can significantly lower an investor's drawback exposure in an unstable market.

Predictability:

By their very structure, long-lasting net-leased residential or commercial properties permit investors to anticipate, far in advance, their future stream of lease payments throughout the lease term. All of the terms, payments, increases, and so on are specified ahead of time in the lease contract.

Whereas an apartment building might need to lower leas because of the slump as the leases show up every 6 to 12 months, the typical net-lease arrangement is longer and connected to the strength of the company's entire balance sheet.

The typical net-lease length and credit backing supplies investors with a more steady and dependable earnings stream.

Simplicity:

Long-term net-leases are usually basic to handle, as most of the functional, maintenance, tax, and insurance commitments are up to the tenant. The landlord is accountable to supply the realty as concurred upon at the preliminary regard to the lease. The maintenance and insurance coverage are the renter's responsibility, and if the residential or commercial property is damaged, the occupant would be accountable to keep and bring back the residential or commercial property for their use at their own expense.

With lots of absolute Net-lease lease arrangements, the tenant should continue to make lease payments to the property manager even if their structure is no longer functional.

In summary, double-net and triple-net leases offer owners with simpleness and the capability to enjoy the advantages of property ownership without a number of the significant management headaches (occupants, toilets, garbage, termites, etc).

Drawbacks of Investment-Grade, Long-Term Net Leases

Single-Tenant Dependence:

The biggest drawback to investment-grade, long-lasting net-leased real estate is that if your primary renter defaults, it can be extremely challenging to find another tenant to change the original.

If financing is tied to the residential or commercial property, it can include considerable tension to your capital as you continue to service your financial obligation while discovering another tenant. Additionally, the new occupant will need some level of occupant improvements-- funds that are utilized to prepare the area for the new renter's particular layout and setup.

Upside Limitations:

The very same benefits that provide stability and drawback defense also offer a limit to your upside capacity. Unlike apartments or industrial residential or commercial property with shorter-term leases that can be increased regularly with an increasing market, long-lasting net-leases are fixed for prolonged amount of times that do not permit responses to short-term market changes.

Therefore, it is unusual for a long-lasting net-lease financier to experience remarkable benefit gratitude upon reselling the asset. Though there are frequently rental increases as part of the contractual lease obligation, these rental boosts are usually limited to 1-2% each year or even might be totally flat without any boosts for certain renters.

Market Rebound:

A financier may get more upside out of this type of investment during circumstances of heavy discounting due to market chaos (what we experienced in 2009-2011). During durations of market turmoil, chances can be produced when sellers are required to dispose of their strong possessions at a discount rate to raise capital for their other portfolio needs and cash shortfalls.

This phenomenon enables ready investors to make the most of market discounts and get more favorable costs and lease terms than would have been otherwise offered in a stronger market.

Please keep in mind that this is no longer the market we are experiencing!

Generally, the net-leased market has actually supported and rates has actually returned to peak levels in many circumstances. This has happened mostly because interest rates have stayed extremely low and financiers, in general, have been looking for yield wherever they might find it.

Net-leased property backed by financial investment grade credit occupants has become really popular for financiers who want the disadvantage defense of financial investment grade occupants but a higher yield than they might get with a business bond.

Other Considerations of Long-Term Net Leases

Location:

The strength of an occupant or lease terms does not remove the requirement for appropriate research and due diligence on a residential or commercial property's location.

Property is driven eventually by need. Commercial realty is mostly driven by its capability to provide consistent, trustworthy, and increasing earnings.

Income is driven by an occupant's desire to take area in a particular area, and income is increased and made more protected when that renter demand is consistent, increasing, and infecting a growing variety of individuals.

Tenant need is driven by their ability to earn a profit in a particular retail area, which is connected to the income growth and consumer traffic of the area. Income growth and customer presence is straight tied to the task growth and population growth concentrated in the particular location.

At the end of the day, we can target which locations will receive strong tenant demand and real estate rental growth by tracking population and job growth as the primary factors of customer demand for a specific area.

Therefore, we arrive back to 3 essential elements of all genuine estate: place, area, area.

The location should not just supply customer and business need, but it is also a good idea to guarantee that a specific residential or commercial property place is essential to the moms and dad corporation. For instance, when Starbucks decided to close more than 600 stores across the country, it selected the assets that were losing cash-- that were not crucial to operations.

If possible, figure out how well a specific area is performing for the corporation. It might be challenging to get these numbers, however it may be possible to survey the quantity of retail traffic and consumer organization carried out at that specific area.

When we assist our investors in locating ideal replacement residential or commercial property, we look for to offer them with residential or commercial properties that have strong occupants, strong lease terms, and strong locations.

Balance Sheet Strength:

Investment-grade scores are inadequate to determine a renter's strength! Credit rankings can be utilized efficiently to weed out weaker renters yet must not be trusted solely to pick practical tenants. Investors must think about the business's monetary statements to make an ideal financial investment determination.

Companies with an investment-grade credit score have balance sheets, declarations of earnings, and statements of cash flow that are openly available. It is necessary to understand a renter's existing possessions, money equivalents, and liabilities.

Simply put, how much cash do they have on hand? What liabilities are they going to have to pay into the future? Are they heavily indebted? Is their revenue topic to decrease? Are their expenditures increasing materially?

Each of these questions should be responded to before an investor decides to depend upon the company's capabilities to fulfill its obligations. We encourage our investors to have a certified public accountant evaluation the tenant company's financials before they make their financial investment choice.

Business Strength:

"Business strength" describes a business's capability to generate continuous earnings through its main operations. A business might have a strong balance sheet and an investment-grade credit score, however if its primary business is dealing with dangers of obsolescence, intense competitors, major trend modifications, monetary pressures, or government interference not formerly experienced, it may be best for an investor to pass.

Avoid the risk if the company can not move its business rapidly enough to avoid major operational and fiscal concerns. Our financiers often target those business that supply necessity product or services such as food, groceries, gas, pharmaceuticals, health care and medical materials, discount clothing, discount domestic and home enhancement supplies, discount vehicle products and repair work, transportation and info provider services, and facilities and utilities devices and services.

While our company believe that there are definitely other types of companies that can do well in more powerful markets, we believe that sticking to customer needs will assist secure our financiers from preliminary and continuous effects of a decline.

Recommendations:

We certainly continue to suggest this type of investment for financiers who remain in a 1031 or 1033 exchange scenario and who should put capital now to defer taxes. But for those investors who have time on their side, this is not the very best time to be acquiring sole-ownership net-leased residential or commercial properties. Instead, we advise portfolio strategies that provide our investors with the income and stability of net-leased investments, however with higher advantage and shorter-term liquidity potential.