Browsing articles in "Triple Net (NNN) Properties"
Jun 14, 2013
David Morgan
Comments Off on Triple Net Lease Definition

Triple Net Lease Definition

The definition of a triple net lease is a lease under which the tenant is responsible for paying the taxes, insurance and maintenance, in addition to the lease payments on a property. Triple net leased properties are often defined as single tenant, stand-alone retail properties such as banks, restaurants (fast food and casual dining), drugstores or dollar/discount stores, however investors have the choice of a wide variety of triple net leased properties.

Characteristics of triple net lease properties

Asset Type – They can be retail, office or industrial

Tenant Credit Quality – They can be investment grade or below

Lease Term – This varies from five to twenty-five years

Value and Size of Property – They can be from $2,000,000 to $100,000,000 or more and from 2,000 square feet to 250,000 square feet or more, as well as a single tenant to multiple tenants.

Location of Property – They can be in small towns or in major metro areas

You can define triple net properties by the ones with the strongest fundamentals as the most likely to continuously pay you income and maintain their value through any economic downturn. Fundamentals refer to being located in a prime location with a solid credit tenant on a long term lease. Prime location not only means in a good physical location for the particular type of business, but also means being in an area that matches the demographics of the tenant.

Here’s a video from EPI Properties discussing NNN properties. Below this, I continue my discussion on NNN Properties. (Please note that I’m not endorsing the company represented in the video, but am referring to them for general information purposes only.)

Benefits of triple net lease properties

Consistent cash flow – Strong credit tenants on a long-term lease give net lease investors a predictable income stream for a long period of time.

Hedge Against Inflation – These properties typically have consistent rent escalations which offer a hedge against the inflation risk.

Passive Investment – In addition to the monthly rent payment, triple net lease tenants are responsible for all operational aspects of the property (including insurance, taxes and maintenance). This makes it attractive to investors that want ease of management.

Great for Estate Planning – The ease of management, potential step up in basis, and the consistent cash flow make NNN properties a very attractive option to investors that have estate planning considerations.

Exit strategies – These are usually easy to implement, as this is a product that is in demand in good times and in bad times. You can usually sell or get financing for this type of property in any economy.

Tax advantages – As long as the IRS will allow deductions for depreciation of assets, real estate will provide you with tax advantages that can offset income from the real estate investment as well as ordinary income protection. To fully understand this, you may want to seek out a tax advisor or accountant. Only real estate can provide you with these types of tax advantages.

Risks of triple net lease properties

Vacancy risk – If the property goes vacant, it becomes 100% vacant and it is typically a single use building, thus showing you the importance of the quality of the credit of the tenant and the length of the lease term.

Bankruptcy or Default – If the tenant becomes bankrupt or defaults on the lease, it can negatively affect the cash flow and the value of the property.

Real Estate Risk – Triple net properties are not immune to risks associated with all real estate, including the potential loss in value.

Triple net lease properties are not averse to risk; however, with the right amount of homework, close scrutiny of the particulars of the deal and making sure that they align with your goals, they can be very lucrative investments with very low risk.

As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me, I truly want to help. My way of giving back is to give away my knowledge. Thank you for reviewing this blog.

Jun 5, 2013
David Morgan
Comments Off on Triple Net Properties: A Great Investment

Triple Net Properties: A Great Investment

A highly popular type of commercial property investment is the NNN leased property.

This is typically a retail property leased to a single tenant with a high credit rating using a triple net lease (NNN lease) which means that the tenant is responsible for paying real estate taxes, insurance and maintenance costs.

KFC

Examples of commonly recognized NNN properties are:

• Banks
• Drug stores like Walgreen’s, CVS or Rite-Aid
• Drive-through restaurants like KFC, Carl’s Jr., or Burger King
• Convenience stores like 7-11 or Circle K.

My belief is that these investments are solid investments because they are typically new or nearly new, they have a quality tenant on a long term lease, you can get attractive financing, there is minimal or no management responsibilities, it has stable cash flow, exit strategies are usually easy to implement and there are numerous tax benefits that only real estate can provide for you.

However, you need to know that these investments are not “risk free” and require a certain level of understanding.

Things to be aware of include:
the tenant’s credit rating – always a major factor – also is it going up or going down?
the overall stability of the tenant – Are they opening locations or are they closing locations? – How long have they been in business in general and this location? – Are sales of the company and this particular location increasing or decreasing?
the location of the property – Is it on a corner or a prominent location? – Is there a traffic signal? – Is there easy ingress and egress? – Is it a part of a shopping center?
traffic counts – What are they? – Compare it to other areas of the City – Are they going up or going down?
demographics – Same questions as traffic counts – Does the area match the tenant (If you don’t know ask your tenant about his customer) – ie, if it is a McDonald’s, are there families and houses around? – If it’s a Bank, are there a lot of businesses around it as well as houses?
local market conditions – Are the conditions improving or going down? – Is it a growth market or stabilized market? – Are houses being built or being torn down? – Is there room for growth?

Questions to ask:

Is the property a single purpose building or is it easy to renovate for another use? – If the existing tenant goes out, can you reuse the building or is it a tear down? – If it is a tear down, is the market now mature enough that you could do a ground lease for the same rent and let the new tenant construct the building or is the property big enough that you could possibly put two tenants on the property or can you get a higher and better use for the property? – Having the existing tenant vacate is not always a bad thing.
What is the overall quality of the building? – Was it well built or cheaply built? – Review the type of materials, the electrical and the plumbing.
Are there deferred maintenance items that may require cash outlay in the near future? – Review the roof and the parking lot very carefully to determine the remaining life and make sure that you take these costs into account when you look at the return that you are expecting – These are costs that you can expect, just make sure that you take them into account when purchasing.
What are the specifics of the lease terms? – Review carefully the existing lease term, the options, your responsibilities, payment history and all of the terms of the lease.
Is there upside potential to the property? – As stated earlier, it is not always a bad thing that you may need to replace the existing tenant now or in the near future.
What is my exit strategy, which should include how long I plan on holding onto the property, if times get tough, how can I exit the property if I absolutely need to and when is my break even point.

If you don’t know the market well or are still a little shaky concerning your real estate knowledge I always suggest getting help from a local commercial real estate broker or try to find a mentor. Also, I always suggest that you have a team which should include a person knowledgeable about construction, maintenance and repair, an attorney and an accountant. These people can help you to understand all of the issues so that your deals can be solid assets and so that you can be well positioned to build wealth over the long term. Always remember that this is still real estate and the fundamentals really do apply.

As I have said before, if you have any questions or I may be of assistance in your real estate needs please contact me. My way of giving back is to give away my knowledge. Thank you for reviewing this article.