Investing in commercial real estate is often complex and time consuming. Whether you are acquiring a multi-tenant shopping centre, industrial complex or multi-family apartment building, the necessary due diligence required can be an intimidating process for the novice or passive investor. The larger the asset and the more tenancies involved typically requires significant and specific personal expertise and demands coordinating with a variety of consultants to complete the transaction, coupled with intensive management post completion.
For those investors looking to simplify their portfolio, the first time investor seeking to break into the commercial property market, or perhaps even a more active investor/developer looking to secure a long-term position within a growing market, investing in single-tenant net-leased assets can be an ideal asset to fulfill that requirement. Whether it is a standalone freehold building or strata-titled commercial retail unit, the appeal of investing in a single-tenant asset is the relative ease of management.
For instance, a 20 year, corporate covenant ground lease with a tenant such as McDonald’s Restaurants would be the quintessential “carefree” investment with zero landlord responsibilities. A ground lease, which is effectively a quadruple or absolute net lease, commonly stipulates that the tenant is responsible for 100% of all expenses relating to the property. Under an absolute or quadruple net lease these expenses would include: property tax, utilities, insurance, landscaping and parking lot repair and maintenance, snow and garbage removal and all other structural repairs and capital expenditures.
However, in our market single-tenant properties are more commonly governed by triple net leases, which stipulates the tenant is responsible for all previous noted expenses with the exception of structural building components and other capital expenditures such as HVAC replacement. Although triple net leases are not as “carefree” per se as a ground lease, for the most part tenant’s typically look after all common area maintenance associated with a single-tenant property. If the tenant is not responsible for ongoing building and site management, there are usually management fees imbedded in the lease (above and beyond the basic rent) to allow the Landlord to maintain its carefree investment and hire a property management company at the expense of the tenant.
Since most investors use traditional financing to acquire commercial property, interest rates will often dictate where the market is at with respect to capitalization rates or “cap rates.” Cap rate ranges for single-tenant retail product in British Columbia are subject to many variables including: geographic (location of the asset), quality of tenant (local vs national), strength of covenant (corporate vs. franchisee), length of term remaining on the lease, underlying land value and how current lease rates compare to market lease rates.
In summary, whether you are a novice or passive investor seeking a carefree commercial property investment, perhaps it’s worth considering investing in a single-tenant net leased retail asset. For further inquiries on this please contact Form Retail Advisors.