By Sunny Sajnani

Single tenant triple net (NNN) leased property is a form of investment that offers higher yields and stability in a time of financial market volatility.  With money to burn but still having a strong aversion to risk, NNN leased property is becoming a very popular alternative investment at a time when interest rates are at historic lows.  NNN leased property is attractive to passive investors as this asset type requires the tenant to assume all risks—such as higher property taxes, insurance premium increases, and structural damage.  The only risk the investor incurs is whether the tenant can stay in business or not!

The Corporate Finance & Net Lease division of Jones Lang LaSalle said “The low interest rate environment and the lack of safe-haven investment alternatives are driving new sources in build-to-suit and sale-leaseback activity, and investors have incredibly healthy appetites for stable and dependable income streams that single-tenant assets provide.”

For the last quarter of 2010 and first three quarters of 2011, CoStar Group shows that sales of single tenant properties have averaged more than 10,000 transactions per quarter—the highest quarterly totals on record.  And for fourth quarter comparable sales, CoStar is showing that pace is continuing.

The availability of inexpensive money from a variety of capital sources, both large and small, has fueled the more than $29 billion of confirmed single-tenant investment sales year to date.  A majority of the investment in single-tenant real estate has been with tenants that are considered investment grade (S&P rated BBB- or better).

Lenders are putting an emphasis on credit quality which has driven increased investor demand for net leased properties with strong credit tenants.   And because the non-investment grade net leased assets are more challenging to finance, the buyer pool for these types of properties is smaller.  This is particularly true when the assets are located in secondary, tertiary and rural markets.

Many institutions and individuals are paying cash and financing after the close.  Some are getting 50% to 60% Loan-to-Values with 20- to 25-year amortizations and 5- to 10-year terms depending on the tenant and term of the lease.  The investment grade credits with long-term leases can still get 70% to 80% Loan-to-Values (and possibly higher) and have a positive spread between the low interest rates and the yield on the real estate.

The smaller deals with riskier credit is almost exclusively coming from private, high net worth investors and family trusts that are targeting higher returns.  These single-tenant properties will trade at higher cap rates but debt is very difficult to find.  Many individual investors are tapping their bank relationships and signing personal guarantees to finance these properties.

As a continued uncertainty with the stock market, single tenant net-leased property will continue to be among the most attractive commercial real estate asset class.  With a variety of different financing sources in the market place, it is a bit confusing which lenders and capital sources are looking for investment grade or non-investment grade, recourse or non-recourse, high leverage or low leverage, risk adverse or yield driven… As a client rep firm, these are all questions that we ask daily when out searching through the capital markets for available debt providers.