If you are looking to invest in commercial real estate property, it’s important to know what the difference is between a single tenant and multi-tenant in commercial real estate.
A single tenant in commercial real estate refers to one tenant occupying the entire commercial property for a long period of time, usually between 10 to 20 years. A multi-tenant in commercial real estate refers to several tenants occupying the entire commercial property in shorter periods of time, usually between three to seven years.
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Single tenant in commercial real estate
The single tenant in commercial real estate is usually an investment-grade corporation that is typically recession-proof. Examples of these single tenants are grocery stores, gas stations, pharmacies and drug stores, and fast-food restaurants, such as Walmart, Walgreens, McDonalds, or 7-Eleven.
In single tenant properties, there is very little landlord responsibility. Generally, there are three types of leases for single tenant property investments:
- Absolute NNN leases: No landlord responsibility
- Modified NNN leases: Minimal landlord responsibilities like roof, parking lot, and structure
- NNN Ground leases: Investor owns the land, tenant owns the building and pays for everything
The best single tenant commercial real estate property is the property with an absolute triple-net lease structure, where the single tenant pays for their own taxes, insurance, and common area maintenance. These single tenants maintain the property like it is their own.
Multi-tenant in commercial real estate
As the name implies, multi-tenant in commercial real estate refers to two or more tenants in commercial property. Examples of these types of properties are apartment complexes, multi-family dwellings, retail strip centers, shipping malls, and office centers.
Advantages and disadvantages of single-tenant absolute NNN investments
Single tenant absolute triple net properties offer the following advantages:
- Reliable monthly income with minimal landlord responsibilities
- Long-term guaranteed lease with credit-worthy tenant, which appeals to lenders
- Periodic rent increases to account for inflation
- Prime location that can easily be rented out at the end of the lease term
One major disadvantage of a single tenant in commercial real estate is the risk of being vacant, when the single tenant is sold, merged, or closes. The single tenant property is either 100% fully occupied or 100% vacant. When it is vacant, the owner is still required to pay property taxes and mortgage payments.
Advantages and disadvantages of multi-tenant investments
Multi-tenant properties offer the following advantages:
- More tenants would mean the property is less likely to be 100% vacant.
- Rental income from other tenants will offset the rental income from a portion of the property that is vacant.
- May command a higher selling price in the future.
Disadvantages of this type of property are:
- Landlords have more responsibilities in multi-tenant properties, such as maintaining the common areas, lighting, roofs, HVAC and heating systems, and plumbing.
- The tenants in a multi-tenant property are less creditworthy than the single tenant in the single-tenant commercial real estate property.
- Multi-tenant properties can have more expenses such as office and maintenance staff needed to allocate taxes, insurance, and other expenses among tenants.
- Multi-tenant properties have shorter lease terms, which give rise to a higher risk of vacancies.
If you’d like to invest in commercial real estate, it’s important to narrow down your choice on whether you should invest in a single tenant or multi-tenant commercial real estate property. Both have pros and cons and it depends on your preference as a landlord on what type of responsibility you would like to take on. You can easily do a 1031 tax-free exchange by swapping your multi-tenant property with a single-tenant property. Should you need assistance, we, at the law offices of Albert Goodwin, are here for you. We are located in New York, NY. You can call us at 212-233-1233 or send us an email at [email protected].