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.
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.
