Short Vs Long-Term Triple Net Leases
We have noticed triple net leases with shorter lease terms are growing in popularity. As an investor, how should I think about these relative to the typical 10 to 15+ year leases when underwriting private real estate strategies?
redfin.com
First off, for anyone less familiar with triple net leases, imagine a lease where the tenant not only pays the rent but also takes on the lion’s share of the property’s expenses. Welcome to the world of triple net leases ("NNN"). In this setup, tenants cover property taxes, insurance, and maintenance costs, earning the lease its "triple net" moniker. This strategy shifts most financial responsibilities from the landlord to the tenant, making it attractive for property owners who want steady income with less management.
That said, it is important to understand that not all triple net leases are the same. Each lease is unique and tailored to the specific agreement between the landlord and tenant. Most NNN lease terms are 10-15 years on average, some even more. But many leading owner operators of new economy real estate, such as industrial real estate and data centers, are employing shorter term leases to enhance outcomes for their investors.
On the surface, there are attractive benefits of longer-term leases - most notably predictable and stable rental income over an extended period reduces financial uncertainty.
But there are trade-offs. Like any investment that requires a long-term lock up of one’s funds, it’s important to consider who you’re signing up to live with for the next 10-15 years… and what could have been achieved if those dollars had not been locked up. Let’s take a look:
Market adaptability & defensiveness:
In dynamic markets, a short-term lease enables landlords to capitalize on potential increases in property value or shifts in tenant demand. In periods of inflation, cost pressure can be dilutive and shorter term NNN leases may better preserve NOI with higher, more frequent contractual rent bumps. By way of example, shorter term leases can see up to 3 - 5% annual contractual bumps versus the typical retail NNN lease tends to have 1 - 2% annual bumps.
Opportunity for capital appreciation:
Owner/operators can more frequently assess opportunities to make improvements or changes to the property sooner, increasing the value of the property itself in addition to being able to demand higher rents going forward. By nature of its long life, returns of a long-term NNN lease depend entirely on the ability of the tenant to fulfill their financial obligations (rent + operating expenses). There is little opportunity for capital appreciation.
Asset type and location:
realtor.com
Shorter term NNN leases tend to be on infill, generic reusable assets that can lease to a wide array of potential tenants. By contrast, longer term NNN leases tend to be with specialized retail tenants in less in demand locations.
All else equal, we believe the flexibility - both to respond to market conditions as well as tenant conditions - favor new economy real estate strategies that focus on shorter term NNN leases with high quality tenants as opposed to a more concentrated portfolio of longer dated NNN lease properties.
AWMS Financial Advisor Solutions Team Led By:
Brendan McCurdy
Head of Research & Marketing
Ready to learn more?
AccessAres is your resource for education and information about the private markets. Talk to us to learn more about these important asset classes.
Investing in private markets involves risk including the loss of principal. Other risks include, but are not limited to: illiquidity risk, valuation risks, and a number of other risks related to private companies in general.
Financial advisors must carefully consider the risks and other suitability details in determining appropriate investments for their individual clients’ portfolios.
Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. Examples provided are for illustrative purposes only and not intended to be reflective of results an investor can expect to achieve. These materials may contain "forward-looking" information that is not purely historical in nature, and such information contained herein is based upon certain assumptions about future events or conditions and is intended only to illustrate hypothetical results under those assumptions (not all of which will be specified herein).
In Canada, this document (this "document") is directed only to Canadian residents that are "accredited investors" as defined under section 1.1 of National Instrument 45-106 Prospectus Exemptions and "permitted clients" as defined under section 1.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. This document is not, and under no circumstance is to be construed as an offering memorandum, an advertisement or a public offering of any securities in any province or territory of Canada (each, a "Canadian Jurisdiction"). Under no circumstances is this document to be construed as an offer to sell securities or the provision of advice in relation to any securities. Any offer or sale of any securities described in this document will be made pursuant to the definitive private placement documents for the securities, which do not include this document. In addition, any offer or sale of, or advice related to, any securities described in this document will be made only by a dealer or adviser registered or relying on an exemption from registration in the Jurisdiction. No Canadian securities regulatory authority has reviewed or in any way passed upon the information contained in this document or the merits of any securities described in this document, and any representation to the contrary is an offence.
Contact Us
Connect with our Wealth Management Solutions team that works with Financial Advisors and Private Wealth Managers to provide alternative solutions. For investors based in EMEA and APAC, please visit our Non-U.S. Investors Contact section.
Individual Investors
Reach out to your Financial Advisor.
Financial Advisor Inquiries
Financial Advisors Information Request
You are now entering the AccessAres website
You are now leaving the AccessAres website
AccessAres is the thought-leadership and educational division of Ares Wealth Management Solutions. The materials distributed by AccessAres are for informational purposes only and do not constitute investment advice or a recommendation to buy, sell or hold any security, investment strategy or market sector. Ares Wealth Management Solutions is a global brand of Ares Management Corporation.