One national tenant on a twelve-year lease, or five local tenants in a small strip?

Question

I've been looking at land and holding patterns for a while and I want something that pays while I wait. Retail keeps coming up, and the two shapes I can actually afford look completely different from each other.

Shape one is a single-tenant net lease building. One national chain, one lease, usually twelve to fifteen years with rent bumps written in. Triple net means the tenant pays the property taxes, the insurance and the maintenance on top of rent, so the checks arrive and there isn't much to do. If that tenant leaves or stops paying, my income is zero until I find a replacement, and I'm one credit decision away from that.

Shape two is a small multi-tenant strip. Five local tenants, maybe a nail salon and a dry cleaner and a taqueria, shorter leases, more turnover. If one leaves I lose a fifth of my rent instead of all of it. But I'm now doing real work, chasing rent, running reconciliations, releasing a bay every year or two, and local tenants have thinner margins than a national one does.

The case for single tenant is that it's genuinely passive and the lease is long. The case for the strip is that the risk is spread and the local rents may be closer to what the market actually supports, so a vacancy reprices at market instead of down from an above-market corporate rent.

I can't tell whether spread risk or contract length is the thing that protects a first-time passive buyer. Voting below and I'd like to hear the reasoning more than the vote.

brandonlee36 · Accepted Answer

The question that decides it is whether you can survive twelve months of zero income from the asset, because that's what a single-tenant vacancy looks like. Not reduced income. Zero, while you still pay taxes and insurance and keep the lights on for showings.

If you have other cash flow that covers the carry, the single tenant is the better fit for how you say you want to spend your time. Long lease, one relationship, one estoppel to read at closing.

If that asset is meant to be the income, the strip is safer in practice even though it looks messier on paper. Losing one of five bays is a rent cut you can absorb. I run a small portfolio and the thing that has actually hurt me is a total gap, never a partial one.

Two things nobody mentions until it's too late. First, on a single tenant deal, read the lease for who owns the roof and structure, because plenty of so-called triple net leases carve those back to the landlord and that's a five figure item on a twenty year old building. Second, on the strip, budget releasing cost per bay, brokerage plus allowance plus downtime, and treat it as a recurring expense rather than a surprise. Once you put a real number on that, the strip's higher cap rate usually shrinks by more than people expect.

Spread risk is what protects you if the asset must pay you every month. Contract length is what protects you if it doesn't have to.

laurenkim53 · Answer

Where I look, the choice mostly doesn't exist. Small towns offer one dollar store box or one tired four-bay strip, and the strip's tenants are the same three businesses that were there in 2011. The single-tenant deals price at higher caps out here for a reason, the replacement tenant list is one name long.

priya_n21 · Answer

I want income without a second job, so I lean single tenant. Thicket's zero-income point lands though. My compromise idea was two smaller net lease buildings with different tenants in different towns instead of one strip, which gets me spread without the reconciliation work. Is that actually cheaper in total, or does two closings and two sets of insurance eat the difference?

paulgrant17 · Answer

This is tenant screening with a bigger number attached. On a house I pull income and payment history. On a single-tenant lease I'd want the operator's financials, and I've read that a lot of these are signed by a franchisee entity rather than the national parent, so the name on the sign isn't the credit you're actually buying. That would move my vote more than lease length.

Rena Guide · Answer

A few terms, since they decide the vote.

Cap rate is the first year net operating income divided by the price. A 7% cap on $70,000 of income means a $1,000,000 price. Higher cap rates usually mean the market sees more risk in that income.

Triple net means the tenant pays taxes, insurance and maintenance. The word gets used loosely. Some leases labeled NNN return the roof, structure and parking lot to the landlord, so you have to read the maintenance and repair section rather than trust the label.

Credit tenant means the lease is guaranteed by a company with published financials. Wren is pointing at something real: many chain locations are leased to a franchisee operating entity, and the guarantee may stop at that entity rather than reaching the parent. The lease and guaranty documents tell you which, and a lawyer in the state where the property sits should confirm what the guaranty actually covers before you close.

Releasing risk is the cost and time to fill a vacancy. On one tenant it is total for a while. On five tenants it is partial and more frequent.

What the choice depends on is your reserve, not your preference. Price out twelve months of taxes, insurance and debt service on the single tenant building. If you can write that check without stress, lease length is protecting you. If you can't, spread income is doing more work for you than a long lease will.

nicole_adeyemi · Answer

Add the dirt to the analysis. On a single-tenant box, ask what the land alone is worth on a hard corner and what the zoning permits by right if the building came down. That's your floor and it's often a third or more of the price. Also read any use restriction recorded against the parcel from the original developer, because a restriction limiting the site to one category will narrow your replacement tenant list badly, and recording practice and what's searchable varies by state. A strip on interior land with shared parking easements has a much thinner floor.

One national tenant on a twelve-year lease, or five local tenants in a small strip?

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