Triple net or NNN leases are real estate agreements where a tenant pays a defined part of expenses besides the rent paid to the landlord. For instance, insurance premiums, property taxes, repair costs, property maintenance, etcetera, are part of the expenses the tenant handles under a triple net lease.
Commercial real estate (CRE) investments are considered risky and high maintenance. They’ve got a reputation for having a fickle resale and rental market value, plus unpredictable management expenses. CRE is also famous for its high diversification cost and illiquidity.
However, there’s a CRE sector that helps you build wealth effortlessly, and that’s triple net lease investments.
This guide will help you invest in triple net lease properties. Meanwhile, consider using this NNN deal finder to view available properties. If you’re a first-time CRE investor, read this triple net lease explained article to the end to see why you need to grow your portfolio with this type of investment.
What’s a Triple Net Lease?
Triple net lease or NNN lease is one tenancy lease agreement where there are no landlord responsibilities. Simply put, it excludes the landlord from handling all the property expenses, such as insurance premiums, repair costs, property taxes, etcetera.
Besides these expenses, the tenant also pays for rent. Triple net leases are often long-term (ten years or more). They also include provisions for rent increment.
What To Look Out For In NNN Properties
Now that the triple net lease has been explained, let’s look at the three components that make an NNN investment successful.
1. The Tenant
The success of your tenant will primarily affect your investment’s success. So if you intend to rely on the property’s earnings, ensure your tenant is financially strong enough to pay rents on time.
The following are some tenant factors to check:
The tenant’s success and strength are crucial for your property investment’s security. Franchisors or large parent companies will often provide more security than small franchisees. So pay attention to the lease guarantor.
Check how many stores the lease guarantor operates. Franchisees can run one store or hundreds of stores. Also, some big parent companies run a few hundred or thousand stores.
Consider checking the guarantor’s public credit rating on S&P or Moody’s if the company has issued public debt. The guarantor’s credit rating entails checking to see that it can fulfill its obligations.
Check the agency’s website to view each credit rating. Remember to go for investment-grade credit ratings rather than speculative-grade ratings.
You’ll need to examine the tenant’s financial information before the lease. If a guarantor is a public company, financial statements will be made public. If you’re dealing with a franchise, ask for the past three years’ financial information before buying the property.
Ensure to check the financial information for debt, operating margins, liquidity, and revenues. Usually, the sales will show an upward trend. If the results are below average, that’s a red flag. However, if it’s above average, it’s good for the property’s stability.
2. The Lease
It’s crucial to understand what is and isn’t on the lease. Ensure to hire an attorney with vast experience and knowledge in leases.
Some of the things to check for in leases include:
The Lease Term
Check the primary lease term and the renewal options. The investor may prefer long-term leases- more than 15 years as they might wish to sell it after a couple of years, seeing as buyers prefer leases with many primary terms remaining.
Some triple net leases have early termination clauses that allow the tenant to terminate the lease before the primary lease term’s expiration.
A triple net lease can use periodic rent increase to offset inflation throughout the term, helping the investment maintain its value. The rent increase is often a specific percentage, for instance, 10 percent or 15 percent every five years. However, a lease might contain an annual rent increment, which is preferable.
Conditions, Covenants, and Restrictions (CCRs) are governing documents that apply to a property that’s part of a more extensive commercial development.
So ensure to check these during the lease review. Pay attention to whether you’re responsible for any maintenance. In addition, confirm whether you or your tenant will handle the responsibilities according to the lease.
Check if the property has a dedicated or shared parking agreement. Sometimes, sharing parking with other businesses can be problematic.
Confirm the tenant’s insurance type. If you’re named as an insured, consider asking for a certificate of endorsement.
Location is crucial when buying triple net lease properties to gain risk-free passive income. Before purchasing that triple net property, ensure the site meets the present tenant’s needs and will continue to meet future tenants’ business needs.
The following are what to check when picking a location:
Check the property’s demography. Examine the household incomes and if the population is growing. Are poverty rates low? Is there substantial employment? Ensure to check all this since a strong demographic support sales.
A business will suffer if it’s impossible or difficult for customers to find the company. That’s why there’s much emphasis on getting a good location. Corner lots are fantastic examples of sites that offer good visibility. Clear visibility from different directions is a significant advantage.
How accessible is the building? Can a customer reach the building easily from any part of town? Can they get into it from multiple access points?
Properties located in commercial areas with high traffic counts are likely to have more customers.
There we have it! Triple net lease explained! This increasingly popular investment option helps people to gain stable cash flow with relatively passive involvement in the property’s daily management.
However, before diving into it, consider the pros and cons of NNN leases. Buyers will have to invest a substantial amount of time examining the deal thoroughly before any purchase to ensure it meets their time horizon and risk tolerance.
With the right amount of proactive risk mitigation strategies and due diligence, triple net leases can be the best addition to your real estate portfolio.