Single tenant net lease property is bought for its predictability. A national retailer signs a long lease, pays the rent, handles the taxes, insurance and maintenance, and the owner does very little.
Most net leases do not require the tenant to trade. They require the tenant to pay. A tenant can close the store, keep paying rent to the end of the term, and be entirely within its rights. The industry calls it going dark.
Why would a tenant pay rent on an empty building?
Because the lease obliges it, and because closing an underperforming location can cost less than operating it.
A retailer rationalising its estate may close stores while continuing to meet rental obligations, sometimes while trying to sublet or assign the space. From the tenant's perspective it is a straightforward commercial decision.
Why does it matter if the rent keeps coming?
Because the value of the property changes even though the income does not.
Residual value falls. A dark store signals that the location does not work for that retailer. Future buyers and lenders take note.
Renewal becomes unlikely. A tenant that closed the store will not renew. Your income has an end date and no extension.
The building may deteriorate. Maintenance obligations continue in theory, but an empty building receives less attention.
Refinancing gets harder. Lenders assess dark stores differently, and loan terms can tighten.
Surrounding value can fall. In a multi unit centre, a dark anchor affects other tenants and may trigger co tenancy clauses.
What does the lease say about it?
This is the question to ask during diligence, and the answer is often disappointing for owners.
Look for a continuous operation clause, sometimes called a going dark clause, which requires the tenant to keep trading. They exist, particularly in leases where rent is partly turnover based, but many net leases do not include one.
Also look at assignment and subletting rights. Broad rights allow the tenant to replace itself with a weaker occupier, which changes the risk without changing the lease.
What can an owner do?
Options are limited while rent is being paid.
- ›Negotiate an early surrender with a payment, freeing the building to be re let
- ›Work with the tenant on an assignment to a replacement occupier
- ›Prepare for the expiry by understanding the market rent and the cost of re letting
- ›Sell, accepting the price a dark store commands
What is usually not available is forcing the tenant to reopen.
How does this connect to exchanges?
Net lease properties are heavily marketed to 1031 buyers, because they close relatively quickly and require no management. A buyer under a 45 day deadline can pay a low capitalisation rate for a long lease with a recognisable name.
The risk being purchased is not the rent for the next five years. It is what the building is worth when the lease ends, and whether the tenant is still trading by then.
What should a buyer check?
- ›Whether a continuous operation clause exists
- ›Remaining lease term and renewal options, and who controls them
- ›Store level performance where it can be obtained
- ›How the rent compares with market rent for the space
- ›What an alternative tenant would pay, and what conversion would cost
- ›The guarantor and its financial position
- ›Whether nearby locations of the same retailer have closed
That last point is the most practical. A retailer closing stores in the region is a signal available to anyone who looks.
Does diversification help?
It spreads the risk. Investors who place all their proceeds in one net lease building carry a single tenant decision. Spreading across several properties, or into multi tenant or fractional interests, reduces the impact of one going dark. Fractional interests are securities available to accredited investors only and carry illiquidity and costs.
What to do first
When you review a net lease property, read the use and continuous operation provisions before you read the rent. Then ask what the building is worth without this tenant, and whether you would still want it at the price. If the answer depends entirely on the tenant continuing to trade, price that risk rather than assuming it away.
Nothing here is tax, legal or investment advice. Lease terms vary. Confirm your review with your attorney.
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This article is educational and not tax, legal, or investment advice. 1031 exchanges are complex — consult your own CPA and attorney. DST and fund offerings are securities available to accredited investors only; all examples are illustrative.