We have recently seen a resurgence in interest in single-tenant net lease properties in the Greater Phoenix market, and an expansion in investor interest in the commercial asset classes where this deal structure is utilized. A financial tool that was formerly focused on retail properties such as pharmacy stores (Walgreens, CVS, etc.) or fast-food chains (Jack in the Box, Burger King, etc.) has been extended: For example, new interest has sprung up for net lease deals for office and industrial properties, and even non-profit tenants, or special use assets such as schools and nursing homes. (This represents a significant change from the last time we discussed net lease properties, when they were struggling in the early months of COVID-19: Net Lease Properties Reveal Their Riskiness.)
As the economic picture gets stronger, a net lease can represent a secure, recession-proof strategy for investors who are seeking stable income. Providing steady cash flow is how net leases earned the nickname “mailbox money.” In the simplest terms, a net lease (also known as a triple net lease or NNN) means that a tenant pays all of the taxes, insurance, and maintenance costs, in addition to their rent—operating the property very much like an owner. The term of the lease and the credit of the tenant tend to be the driver in such deals, vs. the actual asset class or form of the real estate.
In some cases, owners of property utilize NNN deals to recapitalize their interest, providing for the sale to an investor, with a long-term leasehold interest. This enables the owner to recapitalize but retain possession.
Win-Win Net Lease Examples
As an example of the broader view of asset classes that can benefit from net leases, we have worked with non-profits to structure long-term leases that enable them to stay in place/occupancy, while the sale to a third-party investor provides for long-term funding of their programs, enabling them to “do more good”…
In a fairly unusual transaction, we worked with a lender who had foreclosed on a funeral home. The property was distressed, lender owned, or REO/OREO. While the debt structure did not work for the tenant, due to a very high interest rate, the tenant had been in occupancy and was a successful funeral home operator for 30 years. We structured a long-term lease with the tenant and sold the property to a California investor seeking a long-term income stream and an up-leg 1031 replacement property. Through the structure of this transaction, the lender was paid off in full, the tenant was able to remain in the property for less than they had been paying on the mortgage, and the investor received mailbox money…a win-win all the way around.
The Impact of 1031 Exchanges on Net Lease Deals
With the arrival of a new administration and Congress, there had been some concern about changes to 1031 exchanges having a negative effect on net leases. A recent article in GlobeSt.com, Biden’s Under-the-Radar Impact on Net Lease, strikes an optimistic note. NNN real estate deals in lower-income areas—particularly in Opportunity Zones—are likely to expand, while increased education and healthcare spending could provide a tailwind for properties in those sectors. Further Payroll Protection Program (PPP) loans could help as well. With a narrowly divided Congress and general support for current 1031 laws, industry observers believe that there may be modifications, but an elimination of the program is unlikely.
R.O.I. Properties specializes in representing investors, owners, lenders and fiduciaries in buying, selling and leasing commercial real estate throughout the Greater Phoenix market and the state of Arizona. Whether you are interested in a triple net lease deal, need help investing in distressed properties, or need distressed property services, we are full-service real estate brokers who handle all commercial asset classes. In addition, we serve as Fiduciaries through court appointments as Arizona Receiver, Real Estate Special Commissioner/Special Master, Chapter 11 Trustee and Liquidating Agent, as well as REO broker. To put an expert advocate on your side, contact us at [email protected] or 602-319-1326.