A "credit tenant" property is defined as a single-tenant commercial property occupied by a tenant who has a credit rating by Moody's or Standard & Poor of BBB or better.
Compared to many types of real estate investments, investing in Credit-Tenant NNN properties has a number of advantages:
- Most net leases carry terms of 10-15 years
- Net leases mean that the tenant, not the landlord, pays taxes, insurance, utilities, and most maintenance
- Lease terms usually include regular "bumps" or increases
- Management is almost non-existent - just verify for the monthly wire transfer of lease payment
- Financing terms are highly advantageous, due to the credit tenant and length of lease. 100 to 150 basis points over the 10 year treasury are common, and with the best tenants, non-recourse loans may be available.
- The best are very much like a corporate bond, as the lease is guaranteed not by the local entity, but by the corporate entity. This means the asset is more liquid than most, and leverageable.
Some of the more common tenants US-wide include free-standing drug stores such as Walgreens or CVS Pharmacies; Staples; Wal-Mart; Dollar General; and others. Non-retail tenants like Federal Express are also desirable. You should avoid less credit-worthy tenants such as Rite-Aid, Winn-Dixie, and the many video stores such as Bockbuster.
What should you be cautious of? Due diligence consists of researching the company's credit and outlook (using tools such as Standard and Poors), the location (doing phase one environmental investigations), and the lease terms (bumps, market-level rents, etc.). In conjunction with this research, determining the financing terms to calculate your return on investment and optimum holding period is also important.
Credit-Tenant properties can be an excellent addition to your
portfolio, producing returns of 10% and more, with the safety of a
corporate bond. With the proper due diligence, they are a long-term,
safe investment.
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