Introduction to Net Lease
Net Lease investments are coveted as one of the leading options for investors seeking commercial real estate when it comes to passive income and consistency. Net lease properties perform similar to bond securities, with predictable payout structures through the lease, ratings of investment grade or non-investment grade in terms of the tenant, and sometimes protections through corporate or franchisee guaranties, protecting the landlord’s income in the event of unforeseen circumstances.
Investments in this sector have varying lease structures, with the most common being a Triple Net lease (NNN). Triple Net leases are classified as leases where the tenant pays rent to the landlord as well as the property insurance, property taxes, and building maintenance. Many investors purchase these assets to avoid the common “Three T’s” of active real estate ownership, Tenants, Toilets, and Trash. An investment in net lease property can provide stable and hassle-free monthly income through even the most volatile of markets.
Net lease investments range from all the major commercial real estate asset classes of office, retail, and industrial, with the most ubiquitous being retail. Retail net lease investments have many sub-sectors including Banks, Big Box, Drug Stores, and Restaurants to name a few. Each sub-sector can be broken down further, each with different strengths, weaknesses, and performance characteristics.
When we look at restaurants, there are three major types, Quick Service Restaurants (QSR), Casual Dining, and Fast Casual. QSRs are the proper term for “fast food” establishments, with prime examples being McDonalds, Burger King, KFC, and Taco Bell. Casual Dining would be what most consumers consider a normal restaurant such as Chili’s, Olive Garden, and Red Lobster. Fast Casual is the blending of QSRs with Casual Dining exemplified by Five Guys, Panera Bread, and Chipotle.
Understanding the key performance indicators of a Net Lease investment is imperative to being a successful owner or investment real estate broker. Though Net Lease assets tend to be considered recession proof, there are still inherent risks, requiring a specialist’s analysis prior to acquisition. With many options to choose from and risks to be considered, it is important to consult with professionals that specialize in Net Lease prior to making a purchase or executing a transaction.
Ron E. Cruz