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Single Tenant NNN Lease Valuation Model

I’ve been meaning for some time to put together a single tenant net lease (NNN) valuation Excel model for the blog. I had some post-turkey day free time and so I sat down and hammered out a model that I think is pretty cool.

The model is different from your typical DCF in that I use three discount rates rather than one. This is to account for the varying risk profiles of the credit, speculative, and residual cash flow of your typical single tenant net lease (STNL) investment. I also include modules to calculate an appropriate discount rate for the credit-based cash flows and to value the building at the end of the lease term.

vintage Walgreens on corner of two busy california streets

What is a STNL Investment?

For purposes of this post, I use single tenant net lease and single tenant NNN lease interchangeably. I’m referring to properties out-fitted/built to be occupied by one specific tenant. That tenant is a credit tenant, meaning one of the major credit rating agencies (S&P, Moody’s, Fitch) has assigned a rating to the long-term debt of the corporation guaranteeing the lease. A few common examples of STNL investments include fast food restaurants (McDonald’s, Taco Bell), corner pharmacies (Walgreens, CVS), banks (Chase), urgent care facilities, and corporate headquarters.

Sometimes the investor only owns the land (ground lease) and other times he also owns the building (fee interest). The tenant is responsible for 100% of the operating expenses of the property and generally pays most of those expenses directly. Oftentimes, the tenant is also responsible for the upkeep of the building (CapEx), which is referred to as an absolute net lease. So for the investor, these deals can be quite attractive. Just sit back and collect a check each month from a creditworthy tenant on a long-term lease.

a real estate professional using a pen, paper, smartphone, and computer in his analysis

The Risk/Opportunity of Investing in Single Tenant Net Lease Deals

Now, if you’ve spent any time in real estate you’ve come across more than a few single tenant net lease deals. With interest rates spiraling to zero, these deals have become especially popular among the independent investor crowd – many nearing retirement – as an alternative to stocks, bonds, CDs, and money market accounts.

The STNL investor often has little to no real estate expertise, but is enticed by the steady monthly income and low-maintenance aspects of the investment. The issue is, with limited experience these investors too often buy a low cap rate based on the quality of the in-place income without considering the investment’s future value when the credit tenant vacates and cash flows become less secure. They think they’re getting into a simple, safe investment and they’re not necessarily wrong – STNL investments are far less management intensive. But more financial scrutiny needs to be made at the outset to be sure the investor is not overpaying for the investment. Therein lies the importance of a robust valuation model.

First a Word on Why I Built This Model

I don’t personally invest in STNL properties and I’m no more an expert of these types of deals than of any other. As with many of my modeling projects, I took this one on because I want to dive deeper into something I’ve had relatively limited exposure to. So it is with STNL investments. I’ve followed them for years and I understand how to value the various cash flows that a single tenant deal throws off so I decided to take it on.

In addition to the learning opportunity, there’s another reason I built this model. I have a long-term interest in this investment type. I will likely own a few personally at some point in my career. Plus, I see some intriguing diversification benefits that come with a well balanced, well managed portfolio of STNL deals that would be attractive to certain investors. I could see myself one day assembling and managing such a portfolio.

Basics of My Single Tenant Net Lease Valuation Model

So enough with the sidebar, let’s get to the model. I first describe the basics of the model for the benefit of those who can’t access Youtube. I then post a video describing the model more in depth.

The Excel model is organized into two assumption (inputs) tabs, two calculation tabs, two report tabs, and one data tab. All inputs on the assumption tabs flow to the calculation tabs. The outputs from the calculation tabs flow to the report tabs where the results of the analysis are displayed. As always, the model is built with blue font for input cells with the expectation that the user not change non-blue font cells.

  1. Assumptions (inputs) tabs include:
    1. A summary tab for describing the investment including specifications, photo, location map, and strengths/weaknesses
    2. An inputs tab for inserting the financial inputs of the investment including timing, income, expenses, and residual value calculation
  2. Calculation tabs include:
    1. Calculations are performed on the Investment Returns and Valuation tabs.
    2. Calculations are done in monthly periods, and then rolled up into annual periods.
    3. Returns are calculated based on monthly periods
  3. Report tabs include:
    1. Valuation metrics are reported on the Valuation tab
    2. Property pro forma and return metrics are reported on the Investment Returns Tab
  4. Data tab
    1. The data tab includes data validation lists for property and subproperty type plus credit rating agencies and grades
    2. Also includes a credit matrix for assigning discount rates to various credit ratings

I think you’ll enjoy the model. It really got me thinking, and I’m excited to someday use it on a real deal. As always, please verify the formulas and methodology before using this model on a live deal. I haven’t used it professionally and there may well be errors needing to correct. If you find something needing change or just want to say hello, please don’t hesitate to reach out.

Happy modeling!

How the Model Works – Video Walkthrough


Download The Model

To make this model accessible to everyone, it is offered on a "Pay What You're Able" basis with no minimum (enter $0 if you'd like) or maximum (your support helps keep the content coming - typical real estate models sell for $100 - $300 each). Just enter a price together with an email address to send the download link to, and then click 'Continue'. If you have any questions about our "Pay What You're Able" program or why we offer our models on this basis, please reach out to either Mike or Spencer.

Note (especially for Gmail users): The model is sent via email and occasionally is blocked by spam filters. If you don't see the email arrive within five minutes, check your spam folder.

Single Tenant Net Lease Valuation Model

  • Uses three discount rates to effectively account for various risks
  • Meant to value creditworthy, single tenant leased property 
  • Reports expected value and the corresponding cap rate
  • Outputs various unlevered and levered returns metrics including IRR and equity multiple
  • Models various rent increase methods including $/SF/Yr and %/yr
  • Models up to two extension options 
 
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About the Author: Born and raised in the Northwest United States, Spencer Burton has over 14 years of real estate investment and development experience. In his current position, Spencer assesses new investments for a $40bn real estate fund. He resides with his wife and kids in Dallas, TX.