Single Tenant Leased Investments

October 26, 2016

If you’re involved with single tenant leased investments as a principal investor, sales broker or other service provider, you may be familiar with some of the intricacies inherent with financing this unique asset type. While there are ever-changing guidelines and lending standards, a few truths seem to outlive market-driven changes.

The goal of this article is to help investors and investment sales brokers understand financing single tenant leased investments from a lenders perspective.

While every property in this space is unique, there are a few generalizations I can share that may be helpful. I will point out differences in lease agreements, lease terms, tenant credit quality, location, and other considerations that lenders feel are materially important. I’ll also point out how these factors can affect potential loan terms, fixed periods, interest rates, loan-to-value amounts and recourse (i.e. personal guarantee), if any.

While lenders prefer strong primary markets nationwide, smaller markets can be evaluated based on local demographics and market demand for a particular tenant.  Key indicators to look out for in secondary and tertiary markets are traffic counts, ingress/egress and signalized access to major arterials.

Tenant Credit Quality
The reputation, business practices, corporate credit rating or financial outlook, and lease guarantee (if any) are essential considerations to any single tenant deal. The most common way of measuring tenant quality is by using the tenant’s S&P or Moody’s corporate debt rating. Anything listed as BBB-/Baa3 or higher is considered an “investment grade credit.” Most lenders have a preference to making loans on properties with investment grade tenants. If the tenant is not investment grade the lender will generate an internal “shadow rating” based on the review of the tenant financials statement rather than relying on a credit rating.

Franchisees – there are many very strong, privately held franchisees that are either not large enough to garner a credit rating or have no corporate debt that requires one to be issued. Franchisees typically require a lender’s review of corporate financial statements (Balance Sheet and Cash-Flow statements, for example), and any historical information about specific store sales can help improve the lenders assessment of the loan.

Lease Types
NNN comes in many forms, including absolute NNN (no landlord responsibilities) and many sub variations (roof & structure only, roof/structure/parking lot, etc.). There are also many single tenant properties with gross and full service leases. It is important to get legal counsel to thoroughly review each lease so you know what your obligations will be as an investor.

Lease Terms
The lease term affects the total term of the loan available and any fixed periods therein. Longer term leases are more desirable in practice.  In the event the lease is shorter term, for example an 8 year remaining lease term, lenders can typically structure a 5 or 7 year balloon loan. The exception is a full-recourse loan from a life insurance company who may prefer longer-term loans and can be comfortable with the shorter lease term because the borrower provides a personal guarantee. Most lenders also look deeply at the intrinsic value of the real estate. Location always matters. Loan to value and amortization are other metrics that can make shorter lease terms easier to finance.

Wrap up
The Barry Slatt Mortgage Company has expertise in financing single tenant properties of all types. For assistance on your single tenant financing assignment, please call one of our representatives.

Cody Charfauros
Commercial Mortgage Banker