Imagine what it would look like to have a multibillion-dollar company send you a check every month for the next 25 years. Is the idea of having companies like Walgreens, McDonald’s, or Bank of America sending you monthly rent checks enticing? It should be — the peace of mind this could give you is likely far superior to that offered by a local or regional commercial business tenant. With a publicly traded tenant, you could look at its stock ticker to track what condition it’s in.
After selling a hands-on property like a multifamily residence, many investors look to take advantage of the 1031 exchange and seek a replacement property. A variety of net lease investment options come into play here. Per the CCIM Institute, they include:
“Bond Lease. The tenant is fully responsible for operating expenses, maintenance, repairs, and replacements for the entire building and site, without limitation.
NNN Lease. These leases follow the bond lease definition except that capital expenditures are limited, usually in the final months of the lease. The lessee is liable for all of the property’s expenses, both fixed and operating.
NN Lease. This lease follows the NNN, except the landlord is responsible for structural components, such as the roof, bearing walls, and foundation.
Modified Net (or Modified Gross) Lease. The tenant pays its own utilities, interior maintenance and repairs, and insurance. The landlord pays everything else, including real estate property taxes.”
Net leased properties with credible tenants have long been favorites of insurance companies, real estate investment trusts (REITs) and high-net-worth investors. They acquire them because they have long-term leases with little or no management dependability. The occupants are public companies that are often worth billions and have brilliant credit ratings.
You are probably beginning to see the benefits of holding properties like these. When you start looking closer, the deal gets even sweeter: It’s simple, quiet and calm. You can sleep at night without being concerned about cash flow. With no day-to-day management, a multibillion-dollar company is an occupant that tends to all its own maintenance, property taxes and insurance. The property is an imperative part of business operations, and leaseholders are very concerned about exteriors. They want a prime location among demographics that predict high traffic and sales.
These tenants pay their rent like clockwork every month, and the steady cash flow permits you, the owner, to build equity constantly over the lease term. The worth of the main real estate and the excellent credit of the tenant should enable you to get very positive financing terms. Predictably leveraged, with a self-amortizing loan, the assets will be paid off at the end of the original lease term. If the tenant leaves, you still have a valuable property that could be debt free.
When you own these properties, it is important to monitor your lease agings. If you do need to sell, the longer term you have left, the better. If the occupants stay beyond the preliminary term after the asset is paid off, which many do, your investment profits may be increased significantly.
If you don’t want the trouble of management and continual ongoing expenses presenting themselves, read on.