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In the realm of commercial real estate, single tenant net lease financing is an effective tool for developers and investors looking to fund new construction projects. This financing method, particularly in the form of a triple net lease, offers unique advantages and considerations that can make a construction venture pencil. Let's delve into the details of single tenant net lease financing and its relevance to construction projects.
Why Now?
There is a void in the market between the expansion plans of tenants and the availability of financing. Meanwhile, banks have pulled back on lending due to their outstanding commercial real estate exposure and liquidity constraints.
According to an article in Forbes on trends reshaping retail: "In December 2023, the retail vacancy rate across the U.S. was 4.6%, the lowest level recorded by the CoStar Group since they began tracking it in 2007. On the supply side, construction started on just 46 million square feet of retail space in 2023, compared to 82 million in 2022.This decline is due to increased financing costs, reduced capital availability, and still-elevated input costs such as land and materials."
What is Single Tenant Net Lease Financing?
Single tenant net lease financing, often referred to as a triple net (NNN) lease, is a type of arrangement commonly used in commercial real estate. Under this lease structure, a tenant agrees to pay not only the base rent but also the property taxes, insurance, and maintenance costs associated with the property. This type of lease is typically long-term and stable, making it attractive for financing new construction projects.
How Does it Apply to Construction Financing?
For developers seeking financing for new construction, securing a single tenant with a triple net lease can be instrumental in lowering borrowing costs. Here’s why:
1. Pre-Lease Agreements: Developers may negotiate a lease agreement with a tenant even before construction begins. This lease commitment provides assurance to lenders and investors, mitigating risks associated with vacancy post-construction.
2. Stable Cash Flow: The predictability of rental income from a single tenant under a triple net lease reduces uncertainty for lenders, making it easier to secure financing at more favorable terms.
3. Lower Risk Profile: Lenders often view single tenant net lease properties as lower risk due to the long-term lease commitments and the tenant’s responsibility for property expenses.
Key Considerations for Construction Financing with Single Tenant Net Leases
While single tenant net lease financing can be advantageous for construction projects, there’s more to the underwriting of the loan than just having a triple net lease. Lenders will also assess the following:
1. Creditworthiness of Tenant: The financial strength and creditworthiness of the tenant are crucial. Lenders assess the tenant’s ability to fulfill lease obligations over the long term.
2. Lease Terms and Length: Longer lease terms are generally more favorable for financing. Lenders prefer leases with stable, long-term income streams.
3. Property Location and Type: The location and type of property (e.g., retail, industrial, office) can impact financing terms.
4. Exit Strategy: Developers should have a clear exit strategy in place, especially considering the long-term nature of single tenant net leases.
Today’s Single Tenant Net Lease Financing Market
Peachtree is seeing a variety of projects across the spectrum, from standalone quick service restaurants to grocery anchored centers. Currently, our team is favoring deals with experienced developers and strong national tenants.
Why Peachtree?
- Flexible Financing Options: Multiple and single net lease financing across retail, industrial, and medical
- Innovative Solutions: Flexible capital to support complex deals.
- In-House Loan Servicing: Dedicated servicing for a streamlined process.
Single tenant net lease financing, particularly through triple net leases, is a valuable tool for financing construction projects in commercial real estate. By securing a lease commitment from a creditworthy tenant, developers can leverage stable income streams to obtain financing on favorable terms at lower interest rates.
As a nationwide balance-sheet lender, Peachtree Group is ready to facilitate your business plan and get your deal done. Learn more about Peachtree Group’s triple net lease financing terms and get a quote.
Need immediate assistance? Contact Jordan Arzi, lending@peachtreegroup.com