Single Tenant Investment Grade

Definition of Single Tenant Investment Grade (STIG)

In the context of commercial mortgages, Single Tenant Investment Grade (STIG) refers to a property that is 100% occupied by a single business entity that carries an "investment grade" credit rating from a major agency such as Standard & Poor’s (S&P), Moody’s, or Fitch. Generally, this means a credit rating of BBB- or higher from S&P, or Baa3 or higher from Moody’s.

Detailed Description

A Single Tenant Investment Grade property is highly coveted by lenders and investors because the primary source of repayment for the mortgage is the lease payments from a financially stable, global or national corporation. Unlike multi-tenant properties where the risk is spread across various small businesses, the security of a STIG asset rests on the balance sheet and creditworthiness of a parent company with a proven track record of meeting financial obligations.

Common examples of investment-grade tenants include Amazon, Walgreens, McDonald’s, JPMorgan Chase, and Federal Express. Because these companies are unlikely to default on their lease obligations, the mortgage associated with these properties is considered a low-risk investment.

Key Characteristics in Commercial Financing

• Triple Net (NNN) Lease Structure: Most STIG assets operate under a Triple Net Lease, where the tenant is responsible for property taxes, insurance, and maintenance. This provides the lender with a predictable and "clean" net operating income (NOI) for debt service coverage.
• Long-Term Lease Commitments: Lenders typically require the lease term to meet or exceed the term of the mortgage. STIG properties often feature initial lease terms of 10, 15, or 20 years.
• Favorable Loan Terms: Because of the reduced risk of default, borrowers can often secure lower interest rates and higher Loan-to-Value (LTV) ratios compared to non-investment grade or multi-tenant properties.
• Passive Management: For the borrower, these properties require minimal management, as the corporate tenant handles most daily operations. This "armchair" investment style is highly attractive to 1031 Exchange investors.

The Role of Credit Ratings

The "Investment Grade" designation is the most critical factor in the underwriting process for these mortgages. If a tenant’s credit is downgraded by a rating agency during the life of the loan, it can affect the market value of the property and the terms of future refinancing. Lenders view the corporate guarantee of the lease as the primary collateral, often placing as much or more weight on the tenant's financial statements as they do on the physical real estate itself.

Why Lenders Prefer STIG Assets

From a commercial mortgage perspective, STIG assets offer capital preservation. In economic downturns, investment-grade tenants are statistically more likely to continue paying rent than "mom-and-pop" tenants. This stability allows lenders to offer aggressive pricing and non-recourse financing options that are not typically available for higher-risk commercial assets.