NNN Considerations
Triple Net (NNN) Real Estate Investments
Retail Investment Types - How safe are net lease property investments?
Real estate investment is a relatively risky endeavor. It can be considered more or less risky depending on may variables. The Net- lease investment is considered by many to be one of the least risky of all real estate investments, since these properties (usually) do not involve tenant turn-over (and the costs associated with re-leasing) are usually long-term, and if the tenant is considered "investment grade", the risk is substantially mitigated.
Single Tenant Net-Leased: Considered to be the lowest risk property type, since it usually involves a long-term lease, with one tenant. Often the lease is with a "creditworthy" national or regional tenant. Net-Lease properties are usually very well located, quality real estate with good demographics, and probable long-term residual value. Also, these properties are one of the most passive forms of ownership, involves little or no problem tenants and vacancies or related lease-up costs. Although returns vary based on the tenant, lease structure and location, an investor can expect "going-in" cap rates of 5.25% to 8.5%.
An Investment property has three (3) major areas that impact the perceived and potential investment value:
1) LEASE QUALITY
The Lease document, is very important since it contains the clauses which define how "net" the lease is. The lease determines the landlord or owners' involvement in management, and the expenses associated with the operations of the property. The lease also defines the rental stream and its increases (if any), provides the basis for Lease Renewal Option Periods (if any) and sets out the conditions by which a tenant may terminate the lease or reduce its' rent. The lease document is the "blue-print" of the investment and all potential investors are advised to carefully review, with their legal counsel, the lease document very carefully.
2) TENANT QUALITY
The Quality of the Tenant is also very instrumental in determining the value of the investment. Generally speaking, the better or higher the credit or net worth of the tenant, the lower the perceived risk of the investment. Investor's usually are willing to trade return for risk, and accept smaller overall returns in exchange for high-quality virtually risk-free Tenants on the lease. Lesser credit or lower quality Tenants are often very good investments however, because although not considered Investment Grade they are sometimes very good companies that do not have a corporate bond rating because of lack of corporate debt, and or, have a very good story and history and in today's world are often targets of mergers and acquisitions which can lead to credit enhancement. Should this occur, the Investor can realize a better than normal return while receiving the security of a "high credit" Tenant.
3) REAL ESTATE QUALITY
The Location of the property is often considered the most important element in real estate. The old adage; location, location, location was coined because many investors, developers, tenants, lenders and landlords put significant stock in the properties' current and long-term residual value. A property that is leased to an "investment grade" Tenant, under a bond-type lease can still be considered less than desirable if it is in a poor quality or inferior location. Investors' should physically visit any potential acquisition, and review the demographics and other statistical data available prior to rendering a decision (most contracts give an investor 30 days due diligence to make a go/no go decision).
All three of these factors (individually and collectively) have significant influence on the perceived value of a property. A property can be very well-located, have an excellent lease with substantial increases in the rent, yet be leased to a tenant that one may consider speculative at best and potentially headed toward bankruptcy, which will usually lower the value placed on the investment.
No single value component carries more weight than the others. Investors in investment properties should carefully consider each of these factors individually, as well as in combination as they assign their perception of value to the investment property.
Commercial Lease Structure
How long are the leases?
Usually, Net-Leased Investment Properties have lease with lease terms between ten and twenty years. There are investments with less than ten years available for purchase, but they are usually leases that have aged and are often problematic for an investor who must seek financing. Short term leases also have residual value risks. Conversely, there are leases that run longer than twenty years, but these properties are harder to locate and usually are offered only in pure Sale/Leaseback type transactions.
What is a Net Lease?
A Net-lease is a lease by which the rent is "Netted out" of the gross operating costs incurred by the tenant. A Net-lease usually means the actual operating expenses and real estate taxes are not included in the net rent. You are strongly advised that you and your counsel should completely review any lease you are interested in, since slight variations in lease language can have significant impact on how "Net" is the lease.
Net, Net Leases (Double-Net or NN):
Usually means that the tenant not the landlord is responsible for all operating expenses and real estate taxes. Usually however, the owner or landlord is responsible for the building roof and structural integrity.
Net, Net, Net Lease (Triple Net or NNN):
Usually means that the tenant not the landlord or owner is responsible for all operating expenses, real estate taxes and the building roof and structural integrity. There are various forms of Net leases and all have varying degrees of net aspects. The most desirable is commonly called a triple-net "bond" net lease. This lease adds the protection for casualty and condemnation. This is considered the best lease for the owner or landlord. It is often referred to as the "hell or highwater" lease, because assuming the tenant is of investment grade quality, the expectation is that the tenant will pay rent no matter what - even if the property is destroyed by casualty or "taken in condemnation". There is no concern for rental stream interruption.
On the other end of the spectrum, is the net lease ("single" "net" or "N") which has the tenant paying rent and possibly real estate taxes and or operating expenses, but usually involve the landlord or owner making these payments with some amount of reimbursement. This is the most undesirable form of a Net-lease, due to the landlord or owners involvement in the management of the property.
Property Acquisition Process - What is the process to buy a property?
Step 1) Determine your investment criteria.
Consider geographic location, Property Age, Tenant Quality - risk vs. return, and management desires.
Step 2) Review opportunities that meet your criteria.
We provide you with properties that are available. We can help you analyze the investment opportunities and provide you with the significant information to assist you in your evaluation.
Step 3) Submit a Letter of Intent.
Once you have determined that a property (or properties) might fit your criteria, we will assist you in drafting a non-binding Letter of Intent. This document helps you and the Developer or Seller "get on the same page" economically, and assists the attorneys or brokers in drafting a Purchase and Sale Agreement under terms and conditions agreed to by the Buyer and Seller. Often it is advised to write Letter(s) of Intent on more than one property (especially if the Buyer is involved in a 1031 Tax Deferred Exchange).
Step 4) Negotiate a Purchase & Sales Agreement.
Once you have a fully executed Letter of Intent, a Purchase and Sale Agreement is then negotiated by the parties. After all terms and conditions are agreed to between the Developer or Seller and the Buyer, the Earnest Money is deposited with a reputable title company and the Developer or Seller delivers the Due Diligence materials to you.
Step 5) In Escrow – Due Diligence
You then have a specified period (usually 30 days) to review the due diligence (we can provide you with checklists) materials and physically inspect the property or properties. Negotiations, questions and concerns are raised and discussed by legal counsel and both parties during this period. Once all questions and concerns are taken care of, the buyer’s deposit usually becomes non-refundable (a.k.a. – the deposit has gone hard) then the Buyer and Seller can proceed toward a Closing. The escrow is usually 30 days of due diligence with a refundable deposit and another 30 days to close with a hard deposit for a total of 60 days.
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