Single-tenant, net lease investments can provide investors with an attractive, stable yield, while offering some measure of safety and security. The single-tenant properties are 100% occupied under long-term leases that are guaranteed by the corporate tenant. The terms of a typical net lease allow for regular rent increases that produce attractive annual cash yields and transfer the responsibility for most or all operating expenses to the tenant. With rent and most property operating expenses paid by the tenant, the real estate is primarily a passive investment designed to generate stable, long-term cash flows with the primary risk to the owner/lessor being the creditworthiness of the tenant. Since property operating expenses are allocated to the tenant and the lease term is generally relatively long, the cash flows to the owner/lessor of a net leased property are similar to those paid to a corporate bondholder, in that regular rental payments during the term of the lease and ownership of the asset upon the lease’s expiration are similar to a bondholder’s periodic receipt of interest payments and a return of principal upon maturity. Additionally, net leases may provide an owner/lessor with significant protections against inflation, since the contractually specified rent increases typically found in a net lease may equal the inflation rate and the operating costs of the property are allocated to the tenant, thereby insulating the owner/lessor from potential increases in property operating expenses. Finally, because net lease terms are generally significantly longer than those for gross leases, short-term movements in prevailing market rents typically have a minimal effect on income from a net leased property.
