The Single-Tenant Factor in the Net Lease Equation

VEREIT Single Tenant Net Lease

Sponsored by VEREIT

By Glenn Rufrano

What makes a “net lease” REIT? In general terms, net lease is used to describe one segment of the overall REIT industry. Yet unlike healthcare, multifamily, office or other segments, net lease (as a term) inadequately describes the core characteristics.

The term net lease refers to how commercial tenants pay their expenses; it is not a business model. The real differentiating factor for the segment is its focus on single-tenant, freestanding properties which typically utilize the net lease structure, meaning the tenant pays all expenses. Given the cyclical nature of commercial real estate combined with current secular trends shaping the market, single-tenant real estate possesses innate features that can help companies—and landlords—weather change.

When analyzing the effect of e-commerce and omnichannel on physical retailers, it’s evident that announced store closures have largely occurred in malls or anchored shopping centers. Conversely, many freestanding retailers such as Dollar General, Advance Auto and Tractor Supply are expanding. Single-tenant retail is often necessity- or service-oriented and caters well to housing off-price concepts, which makes it integral to customers’ daily lives and their growing preference towards discounters. Free-standing retailers like Walmart and Home Depot, rather than the shopping center, are the destination for customers alleviating the need for co-tenants or anchor tenants to draw in traffic.

Other property types also benefit from occupying freestanding locations. Restaurants, for example, have the ability to focus on convenience and locations that best serve their customer base. Similarly, industrial properties can be strategically positioned to serve as integral hubs within a company’s logistics framework. And freestanding office properties often operate as corporate or regional headquarters and house mission critical operations. Regardless of the property type, it is important to note that freestanding properties are generally leased by creditworthy tenants, which increases the certainty of the landlord collecting rent even if a tenant should cease operations. Lease terms are also typically longer for freestanding locations (10+ years), and it generally costs more for tenants to close locations with longer leases. Consequently, tenants will often work with the landlord to find a replacement tenant and even contribute to re-tenanting costs. These attributes provide additional layers of protection for landlords during cyclical downturns.

Freestanding, net leased locations are generally more attractive to tenants as well. One primary reason is budget: Tenants can better understand, project and control operating costs while also frequently making substantial investments in FF&E or the customization of the property. And, in contrast to multi-tenant assets, there is also no need to contend with landlords over pass-throughs or to perform CAM audits as these provisions are already accounted for in the lease. Additionally, co-tenancy triggers are less of an issue as well as use restrictions or limits on merchandising. For example, Target and Best Buy are leveraging such limitations in their lease agreements to bar Whole Foods locations in shared shopping centers from carrying general merchandise products from Amazon.

Any assessment of the net lease REIT segment today is incomplete without considering the single-tenant factor in the equation. While the structural format of any lease is significant for both landlords and tenants, the influence of freestanding property ownership enables a REIT portfolio to host a lineup of tenants who can best withstand fluctuating economic trends and consumer tastes.


Glenn Rufrano serves as the CEO of VEREIT Inc., a $15 billion publicly traded REIT with a focus on single tenant retail, restaurant, office and industrial.

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