Net Lease Retail Investing

Net lease retail properties are a great investment for people looking to diversify their portfolio, acquire long term investments or anyone looking to get a steady monthly income.  Net lease retail properties are commercial investment properties in which the landlord is paid a monthly rental rate from the tenant or lessee for the life of the lease term.   Typically these types of investment properties are single tenant.

Contrary to what most people think companies such as Advance Auto Parts, Dollar General, Burger King, Applebee’s, and Verizon do not own their building locations. Instead of having all of their capital wrapped up in real estate, they lease their locations from a landlord (lessor) and pay them rent every month.  Most net lease retail investments are single tenant properties and unlike a shopping center, which has multiple tenants. Net lease retail investments should not be confused with a franchise.  In a net lease scenario the landlord does not have to worry about employees coming in late, rude customers or the operation of the business.  Landlords in many cases only have to deal with opening their rental check envelope once a month.

The net lease retail investment typically gives the landlord a simple investment since there is only one tenant and therefore there are little to no management fees to deal with. There are no vacancy factors to figure out and since the building has already been approved by the tenant, there are no tenant improvement issues to be resolved.

In the world of net lease retail investing there are basically two types of retail leases- Double Net and Triple Net or it can be written “NN” and “NNN”.  The difference in the two is the amount of responsibility the landlord has.  Currently most national or regional net lease retail companies will pay for the taxes and insurance of the building or reimburse the landlord for those expenses. That will be explained in detail in the lease. Those companies would include for example Dollar General, Family Dollar, Advance Auto, AutoZone, CVS, Verizon and AT&T.


A single-tenant retail net leased property gives a (fee-simple) ownership of a free-standing, commercial property, which is leased to a credit retail tenant such as Verizon, CVS, Dollar General or AutoZone on a long-term lease, providing a stable monthly cash flow. In the case of a Triple Net Retail Lease the tenant will be responsible for the repairs, maintenance, and taxes of the property.

Double Net or NN lease- A lease in which the tenant or lessee is responsible for the entire building except the roof, structure, and foundation. The roof, structure and foundation are the responsibility of the landlord. The landlord would be responsible for any repairs or expenses dealing with those parts of the building.  Typically the roof will have a 20 -25 year warranty so that can be very helpful in case of a leaking roof.  The landlord in some cases may be responsible for the replacement of the HVAC system while the tenant is just responsible for the maintenance and upkeep of the system.  Some net lease retail companies pay a monthly fee on top of the rent to the landlord to take care of the parking lot and common area to make sure it is clean and neat.  Typically the landlord will be responsible to fix any potholes or cracks in the parking lot. Depending on the expertise of the landlord they may want to live within driving range of the property in case some roof issues or parking lot issues arise or at least have a property manager close by if needed to deal with any issues properly.

Due to the fact that the landlord has some responsibilities to the property, these net lease retail properties have a higher rate of return or cap. rate on the investment than the Triple Net Retail leased properties

Triple Net (NNN) retail lease is defined as a lease where the tenant (lessee) is responsible for everything associated with the property. The triple net or NNN lease is considered a “turnkey” investment since the landlord is not responsible for paying any repairs or operating expenses. It is very important to read the lease carefully and make sure it is a true NNN lease and that the landlord is not responsible for any expenses. The primary advantages of triple net lease investments are that you get a predictable revenue stream over the life of the lease.  The NNN retail lease is management free, so anyone can own a retail net lease property anywhere in the country because the tenant takes care of everything from the roof, HVAC system, parking lot, taxes, etc.  The landlord’s bottom line is protected even if taxes rise, the HVAC system needs replacing or there is roof damage. Because NNN retail lease shifts the responsibility or risk from the landlord to the tenant, typically the leases do not pay as high of a rate of return or cap rate than the Double Net retail leases.

While these are great reasons to purchase retail net lease properties, there are some risks involved. First, because most retail net lease investments are for single-tenant properties, tenant credit risk is important to understand. Today there are a lot of strong companies which back their leases with a corporate guaranty such as Verizon, Advance Auto Parts or Dollar General. These companies are publicly traded and financially secure. On the other hand, it is possible for financially strong and publicly traded company to falter over the term of the lease and go bankrupt. Since single retail net properties are either vacant or fully occupied, this should be taken into consideration.

The most important aspect to take into consideration when analyzing a retail net lease investment property is understanding the credit risk of the actual tenant. Analyzing the credit rating and financial statements of the tenant guaranteeing the lease is essential to understanding the amount of risk the landlord will have. After all, a lease is only as strong as the company that guarantees it.

Cap Rate is an abbreviation for capitalization rate, and it is the rate of return on real estate that is purchased for investment property. The cap rate is based on the amount of income that an investment property is expected to generate and is used to estimate an investor’s return on investment.  The higher the cap rate the higher the rate of return is.  However, typically the higher the cap rate also means the higher the risk is for the investor or landlord.

1031 Exchanges also known as Like-Kind Exchanges under Internal Revenue Code Section 1031, must involve business or investment property to qualify for a tax deferment.  Like-kind exchanges of unequal value may involve taxable gain. The IRS has specific timelines for the completion of 1031 Exchanges. To avoid taking premature control of the proceeds before the transaction is complete, taxpayers usually employ qualified intermediaries and an attorney to handle the transaction.  1031 Exchanges can be complicated and steps must be taken to insure compliance with all of the rules and timelines to maximize the benefit of the exchange. The main advantage of a 1031 Exchange is the postponement of capital gains tax. The 1031, or Like-Kind Exchange is the selling of one property to purchase a similar property.  The exchange is done for a variety of reasons including purchasing another property which may have a better cap rate or purchasing a property with a longer lease term.

My Wheeelhouse…

I work with both Buyers and Sellers from across the country with retail net lease investment properties.  I specialize in 1031 Exchanges, and work with seasoned investors, as well as investors who would like to get started in owning net leased properties. With the headquarters located in Columbia, South Carolina, National Asset Realty prides itself on delivering superior client service while offering the most current advanced marketing techniques in today’s marketplace.

National Asset Realty will provide the following marketing and sales services:

*Current comparable sales information

* Full Marketing and Sales Package on the property that will include aerials, site photographs, detailed maps, investment information, up to date demographics, traffic counts, and financial data

* Advertising through major national commercial real estate channels such as CCIM, Loopnet, Costar and NNNex

*Marketing to national and regional investors

* Broadcast sales package to national and regional investment brokers

* Aggressive marketing campaign to national and regional REITs

With the headquarters located in Columbia, South Carolina National Asset Realty prides itself on delivering superior client service while offering the most current advanced marketing techniques in today’s marketplace.