Net Lease Market Outlook

After a solid 2019 performance, the net lease industry appears to be headed for continued success in 2020. A combination of low interest rates, changes in the United States tax code and the desire for greater return on investments have caused high demand within the net lease market segment.

Lower Interest Rates, Greater Yields

At the start of 2020, many investors feared interest rates might increase, which would lead to a correction. Instead, interest rates have remained fairly low. Since the cost of capital is lower, buyers are free to invest money into larger deals. With this in mind, many commercial real estate owners are taking this opportunity to sell their smaller assets at superior price points. This, in turn, has created a steady supply of properties for potential buyers.

Slight Slowdown in Retail Development

A decrease in retailer development in certain markets has led to an inevitable slowdown in new retail development since 2016. However, the properties that are being built are extremely desirable for buyers. As always, newly built assets are sold at a premium due in part to their long lease terms and low maintenance costs. In addition to these new construction projects, resale properties have become popular in many markets.

Types of Properties in High Demand

The single tenant net lease (STNL) market has long been viewed as a stable investment vehicle. Guaranteed rents and known financials are just two of the many factors that make net lease assets ideal investments. The most in-demand properties in the STNL sector have a few things in common: these assets are brand-new construction in enviable locales with credit-backed tenants. Additionally, potential buyers prefer properties with Internet-proof tenants.

These preferences have led to the rise in popularity of quick-service restaurants (QSRs) among investors. Most trophy assets in the QSR market feature strong credit tenants whose profits are not hampered by Amazon and other Internet retailers. These lower-priced properties tend to have scheduled rental increases every five years and longer lease terms. Ground + Space currently has a McDonald’s for sale in California, Maryland that is a prime example of an enviable QSR asset. Other popular tenants in the QSR space include Starbucks and Dunkin’ Donuts.

Multi-tenant properties are also in high demand, especially those created via break-up strategies. To put it simply, a break-up strategy involves dividing a property into multiple parcels which can then be independently sold to different investors. This strategy is successful in part because it caters to the needs of a larger field of buyers. More buyers are in need of properties within the $2 million to $5 million range than larger properties with price tags of more than $30 million. The team at Ground + Space have worked with several property owners to facilitate break-up strategy sales of trophy assets in major markets.

About Ground + Space

Interested in maximizing your investment opportunities? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to receive a full evaluation of your commercial real estate assets. We can help you determine whether now is a good time for you to sell your property.

What is Commercial Real Estate?

What is commercial real estate?

Commercial real estate includes any form of property or real estate used to produce income. Some businesses own the space they occupy, but most commercial real estate is leased from an investor through a net lease broker for one to ten-year terms. An investment lease brokerage firm acts as an in-between for the tenant and landlord or investor and as an advisor for all of their clients. These brokerages facilitate the sale and leasing of commercial properties for business or investment purposes. Distinct types of leases and exchanges are designed to accommodate the variety of commercial real estate property acquisitions.

Types of Properties

Commercial property encompasses many different kinds of spaces. They can be classified into several different categories including office, retail, industrial, multi-family, land and special purpose.

Office real estate is broken down into single or multi-tenant properties and categorized by classes A, B and C. Retail properties include single or multi-tenant buildings and shopping centers comprised of banks, stores, restaurants or strip malls. The industrial commercial real estate category is made up of an array of tenants and building structures, which typically involve construction, manufacturing or production plants and warehouses. Multi-family real estate covers all residential property except for single-family homes and, like office property, is graded for quality by classes A, B and C. Commercial land real estate is undeveloped property, including previously developed land that becomes compromised or condemned. Special purpose commercial property is real estate owned by investors or businesses that do not fit into any of the five main classifications, such as churches, entertainment spaces, hotels or self-storage.  

Types of Property Leases

Commercial real estate brokerages work with tenants and investors to establish a method of leasing business property that satisfies the involved parties. The primary types of commercial real estate leases include gross leases, net leases (single, double or triple), pass-through leases and percentage leases.

Gross leases are simple, rent-only agreements, that typically include agreed-upon future increases.  Single, double, and triple net leases are contract agreements that incrementally supplement the tenant’s financial responsibilities on top of the predetermined rent. Pass-through leases, or modified gross leases, are contracts that make the tenant responsible for a proportional amount of any combination of property expenses in addition to rent. Percentage leases require that the tenant pays rent as well as a percentage of the sales earned from conducting business on the rental property.

Types of Tax-Deferral Property Exchanges

Commercial real estate can be acquired through a few different forms of property exchanges that also allow the deferral of capital gain taxes. The Internal Revenue Service’s (IRS) tax code outlines these exchanges in sections 1031, 1033 and 721.

A 1031 exchange allows investors to exchange ownership of like-kind commercial properties without having to pay taxes on the appreciated capital gain. Section 1033 of the IRS tax code describes a regulation that allows the exchange of equivalent-use properties as a result of involuntary conversion or forced loss. Section 721 contains a tax deferral option that allows investors to exchange commercial property for shares in a Real Estate Investment Trust (REIT).  A 721 exchange puts the ownership and management of the property into the hands of a commercial real estate investment firm.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!

What is a Net Lease?

Commercial real estate leases fall primarily into two categories—either a net lease or a gross lease. The most common type of lease in commercial real estate is a net lease because it relieves landlords of serious financial responsibilities and gives tenants more control over how much they’re spending on certain services. But what exactly Is a net lease? Read on to find out everything you need to know about net leases in commercial real estate.

Features of a Net Lease

On top of the pre-established based rent, a net lease requires the tenant to assume responsibility for at least one, if not all, of the additional operating expenses associated with the property. Three different types of leases exist to determine which portion of these additional expenses are to be paid for by the tenant. A single net lease requires the tenant to pay both the rent and the property tax on the property, while a double net lease requires the tenant to pay the rent, the property taxes and property insurance for the space. A triple net lease requires the tenant to pay all of the expenses associated with the property, including the rent, property taxes, insurance, maintenance costs and repairs.

Advantages of a Net Lease

A net lease is a common type of lease in commercial real estate because it benefits both landlords and tenants. For landlords, it alleviates significant financial responsibilities of owning and operating the property. Net leases streamline the process of paying insurance and property taxes and make paying these expenses less complicated and stressful for the landlords. In addition, net leases give landlords a predictable source of income because they eliminate unexpected expenses and alleviate the financial responsibility of property taxes and insurance, which typically fluctuate over time.

Tenants experience significant benefits of net leases as well. Because tenants assume the responsibilities of additional expenses, net leases generally result in lower rental rates of the actual property. Additionally, net leases give tenants more property control because they are held accountable for at least a portion, if not all, of the property expenses. Accordingly, a considerable amount of property control is allotted to the tenant. Renting under a net lease gives tenants a closer experience of property-owning than a typical renter.

Considerations of a Net Lease

Net leases also can have some drawbacks if the building or property is not properly maintained and managed. For tenants, the maintenance costs might outweigh the lower cost in rent if there are constant major repairs. Likewise, most landlords prefer insurance and tax payments to pass through them to ensure the amount is correct and on time, which at times may complicate the process more than simplify it.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!

Single, Double and Triple Net Leases: What’s the Difference?

A net lease is a contract in which the tenant agrees to pay a predetermined price for rent as well as specified additional expenses associated with the property. These additional expenses can include property taxes, insurance, maintenance and repairs. How do you determine which of these costs the tenant is responsible for paying? Single, double and triple net leases exist to clarify which of these additional expenses are the tenant’s responsibility. Read on to discover the difference between single, double and triple net leases.

Single Net Lease

Single net leases are the least common type of net lease. In a single net lease, the tenant is responsible for paying all or a portion of the property taxes on the property in addition to the pre-established rental rate. While this financial responsibility shifts from the landlord to the tenant, most landlords still prefer the payment to pass through them to ensure the amount is correct and on time. Under a single net lease, the tenant assumes the least amount of financial responsibility for the space as possible within the limits of a net lease.

Double Net Lease

Under a double net lease, the tenant is now responsible for paying the property taxes and insurance for the space in addition to the established rental rate. All other expenses, such as maintenance and repairs, remain the landlord’s responsibility. Double net leases are particularly common in commercial real estate, and in most cases, landlords of larger commercial developments charge taxes and insurance expenses proportionally to the size of the leased space.

Triple Net Lease

A triple net lease removes the landlord from most if not all of the financial responsibility associated with the property. In a triple net lease, the tenant pays taxes, insurance, maintenance and repairs in addition to the rent. Triple net leases are commonly used for long-term periods (ten years or more) in freestanding commercial buildings leased to one tenant. Because this leasing method shifts the majority of additional expenses to the tenant, triple net leases typically have a lower rental rate.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!