Single Tenant Triple Net
The third type of industrial investment is the single tenant triple net leased investment (STNL). These types of investments can often times be great fits for conservative investors who prioritize stable long term cash flow over maximizing returns. They are looking for a safe place to park their funds at an attractive rate with all the tax benefits of ownership.
The quintessential example here is buying a warehouse that is leased to FedEx for the next 10 years. However, these properties can come in any size and geographic area. The central concept here is that you are purchasing a warehouse that already has a tenant with a triple net lease in place. There are dozens of factors that will have an impact the pricing of a STNL property. The length, credit, and rate of this income stream are the first set of factors that will dictate its attractiveness. An industrial property with 3 years left on the lease will be viewed much differently than one with 15 years left. For example, if you need a loan on a property with a 3-year lease, you will likely find that you can only get a 3-year loan which may not be consistent with your long-term hold strategy. You will have to evaluate the credit of each tenant: a kid’s trampoline center, a regional moving and storage company, and a global oil company all have different revenue streams. Lastly, the amount of monthly rent the tenant is paying compared to the current market rate will also play a large factor. If the tenant is paying 25 percent more than the market rent, and the tenant goes out of business, you will now have to release the property and your income stream will have gone down substantially. It might not cover the loan payment.
Secondary considerations are the property characteristics, the submarket demographics, and your ability to lease the property in the future. If you have a 15-year lease and you plan on holding on to the property for 5 to 7 years and selling it to 1031 exchange into a larger property, you might not delve as heavily into all of the factors that would be relevant to future leasing. If you are like one of my clients that owns 9 single tenant industrial buildings, you realize that if you are in the game long enough you have to re-lease your properties at some point. If you have to re-tenant eventually than you want to have an functional building in a growing area. While vacancy has been historical low for the past decade, there have been times where buildings have sat on the market for months to years at a time. Anybody who has been through that market has a more discerning eye for property and market analysis.
Single tenant triple net leased investments are simple, low-risk, and generate moderate returns. Triple net leases are set up so that the tenant is responsible for paying all of the property tax, insurance, and maintenance on the property as if they owned it. If they have a long-term lease, you will be freed up to use your time as you see fit rather than managing tenants, property managers and real estate attorneys.
Sale Lease Back
The last primary industrial real estate investment that high net worth individuals like is the sale-leaseback. The only difference between the single tenant net leased industrial investment and a sale-leaseback is that the tenant is the company that is selling the building. Companies look at sale-leasebacks as a financing instrument. As such investors in sale-leasebacks will underwrite the company much like a banker would. You want to know why the company is trading their ownership stake in the building for capital and what they intend to do with this newfound capital. Usually you will find a company that is in some form of reorganization and they are using the funds to pay off debt and focus on acquisitions.
One sale-leaseback I listed and sold recently in Tustin, CA was for a printing company. This printing company had been in business for 20 years, and in the same warehouse for the last ten years. The printing industry, however, has been going through massive consolidation as digital media has gained prominence. Printing companies have had to be nimble and adjust, which is difficult for a business that requires capital investment in the form of large format machines. Printers have had to diversify their services from print mail to packaging for cosmetics, craft beer, CBD and other new growth industries. This particular business was trying to add a digital marketing agency to their business to become more vertically integrated. To fuel this growth, they decided to sell the building and then lease it back from the buyer.
The creative advantage with a sale-leaseback is that the sale price and the terms of the lease on the leaseback are negotiable. The buyer and seller have more room in these transactions to structure a sale that is mutually beneficial. The lease rate, purchase price and cap rate are all variables of the equation.
You will need to prioritize these variables as will the seller. Sometimes the seller will want to maximize proceeds which means they will try to offer the lowest cap rate possible to maximize the property value. Buyer’s on the other hand usually want to increase their cap rate by offering a lower purchase price.
Other considerations in a sale leaseback are the length of the lease term, capital improvements and security deposit. Remember you are not just buying a building, you are also signing a lease. That means you need to put your landlord hat on while you are in the middle of buying the building. As a landlord you need to think about what lease term you and the tenant can agree on, you need to think through the condition of the property, roof, and HVAC units at a minimum. You also need to think through how to handle security deposit, not only in the amount of deposit but also the payment method.
Most first time investors don’t wander into sale leasebacks but the experienced investor often times prefers these because there is more room for them to create the investment of their choosing rather than buy a lease that they did not craft.
