Selecting a property can be a challenging task for anyone, whether they’re first-time investors, or agents striving to meet their clients’ expectations to close real estate deals successfully. Given the inherent fluctuating nature of real estate, properties that seem good now may suddenly not be so valuable in the future. After all, investments aren’t free, so it’s essential to research extensively when purchasing properties. Of the many types of properties out there, triple net leases (or NNN) offer some of the most lucrative options for investors.

That said, it’s not a simple buy-and-forget investment. If anything, it’s quite the opposite.  While it’s relatively low-risk compared to other properties, it also requires a bit more work. In this article, we’ll take you through the nuances of NNN properties, and teach you how to maximize their long-term value.

What are triple net leases (NNN)?

An NNN lease is a property agreement wherein the tenant essentially shoulders most of the expenses for the property. Expenses like real estate taxes, building insurance, and general maintenance become the tenant’s responsibility. NNN agreements offer lower rates for rent to compensate for the extra expenses.

Of course, every property owner has different caveats of what “most expenses” means.  Generally, property owners are still responsible for utilities outside your rented space, the structure itself, and the roof in NNN leases. Operational expenses will be the bulk of negotiations for these property agreements. Understanding these aspects is crucial for making a profitable NNN investment possible for the investor.

Benefits of NNN properties

Now that you understand NNN properties, it’s time to look at their many advantages, primarily on the landlord’s side. NNN properties are most popular in commercial spaces, such as warehouses, shops, and restaurants thanks to the following benefits:

Steady Revenue

NNN properties provide landlords with a reliable stream of income. Tenants are responsible for the bulk of heavy expenses like property taxes, insurance, and maintenance. Thus, landlords can anticipate consistent payments without the fluctuations that may come with other lease types. 

Less Complex

Compared to other types of property arrangements, NNN leases tend to be more straightforward. With tenants taking on responsibilities for expenses, landlords avoid the complexities of property management. This simplicity saves time and effort in administrative tasks.

Low Risk

NNN leases offer landlords a lower level of risk compared to traditional leases. Because tenants are responsible for covering operating expenses, landlords are less exposed to unexpected costs or liabilities. This reduced risk provides a sense of security and stability for property owners.

Flexible Terms

Landlords have the flexibility to negotiate terms that align with their preferences and goals. Whether adjusting lease durations, setting rental rates, or specifying responsibilities, NNN leases allow for customization to suit the needs of both parties. This flexibility facilitates mutually beneficial agreements and fosters positive landlord-tenant relationships.

Long-Term Occupancy

NNN properties often attract tenants who are looking for stable, long-term arrangements. Since tenants have a vested interest in maintaining the property and its profitability, they are more likely to commit to extended lease periods. This result reduces the risk of vacancies and provides landlords with a reliable source of income over time.

Pitfalls of NNN leases

While NNN leases can be quite lucrative for relatively low risk, there are still some potential worries.  Namely, the deceptively “simple” nature of NNN leases may lead landlords to make mistakes they would otherwise have caught on other leases. 

Careless Maintenance

In NNN leases, tenants bear the responsibility for property maintenance. While this may seem advantageous for landlords, it can lead to complacency regarding property upkeep. Landlords might assume tenants will address maintenance properly, but some tenants may not be up to the task. Failure to proactively monitor and address maintenance concerns might ruin the property altogether. 

Fluctuating Tax Rates

Although tenants typically cover property taxes in NNN leases, landlords should remain vigilant about potential fluctuations in tax rates or assessments. Unexpected increases in property taxes could strain the profitability of the lease arrangement for landlords, especially if lease agreements do not include provisions to address such fluctuations.

Insurance Gaps

While NNN leases typically require tenants to maintain insurance coverage, landlords must ensure that the coverage is adequate and comprehensive. Failure to verify the sufficiency of insurance policies can leave landlords vulnerable to potential gaps in coverage, exposing them to financial risks in the event of property damage, liability claims, or other unforeseen circumstances.

Default Risk

Despite the stable income potential associated with NNN leases, landlords still face the risk of tenant default. Economic downturns, operational challenges, or unforeseen circumstances can impact tenants’ ability to fulfill lease obligations, including rent payments. Landlords should conduct thorough due diligence on prospective tenants to assess their financial stability and reliability. 

Lease Misunderstandings

The apparent simplicity of NNN leases may lead to misunderstandings or oversight regarding lease terms. To prevent misunderstandings, landlords should ensure that lease agreements are clear, comprehensive, and accurately reflect the intentions of both parties. Otherwise, a long legal battle might await you in the future. 

Final Thoughts

NNN leases are a solid and reliable investment. Of course, like any investment, it’s important to understand why it’s solid and reliable in the first place. NNN leases offer long-term value thanks to being low-risk and shuffling off most of the property responsibilities to the tenant. However, landlords should stay vigilant about the tenant’s responsibilities, and communicate with them often. In that way, investors can ensure the property generates the value it should.  

One amazing aspect of investing in NNN triple net lease properties is the low ticket for entry. For as little as $1.5 million, investors can own a property tenanted by a nationally recognized brand and get reliable and passive monthly income for as long as 15-25 years.

However, triple net lease investment properties with lower price points are not easy to find, and they usually have short-term leases and may include a lot of deferred maintenance. New NNN investors should also note that high-cap rate, low-price lease properties are riskier purchases than higher priced properties. It follows therefore, that it is also more challenging to finance lower priced properties. On the flip side, when investors factor in financing, tax write offs and lease rent escalations over a 12 to 20 year NNN lease term, an advertised 5.00% cap rate can easily translate to a 7.5–11% compound annual rate of return!

When using debt to buy a triple net lease property, investors must have a minimum of $1.0 million in net worth and have cash on hand ready for a down payment of up to 40%. The amount of financeable debt mostly depends on tenant credit, as well as location, lease term, etc. The better the net lease tenant’s S&P credit rating, the higher the amount of borrowing that is possible for investors. Investors aiming for lower NNN asset prices should look at:

• C-stores/gas stations ($1.0–2.0 million)
• Medical brands, such as dentists, dialysis or urgent care stores ($2.0 million)
• Quick service restaurants such as Burger King, Wendys, Chicfilet, etc ($1.5 million and up)

When evaluating a triple net lease investment here are some key factors NNN investors must deliberate:

• Will rent receipts cover debt service?
• The length of lease term best tailored to debt payoff?
• What and how much tax and depreciation write offs are required?
• Will another property be exchanged using IRS section 1031?

Broker Robert Gamzeh and his team are multi-decade experts at finding NNN properties in price ranges $1.0 million and up. The team uses its extensive technology and broker networks to identify possible investment triple net lease properties that will best meet your investment, tax, lifestyle and 1031 criteria. Call 202-365-3050 for a free consultation.

NNN buyers need to know these 5 lease clauses

NNN leases have many provisions that could pose a threat to your successful investment. At the Triple Net Investment Group we vet and monitor the nitty gritty of the constantly changing NNN investment property market like a hawk, and interact daily with hands-on investors, legal experts, CPAs, and other professionals to understand the pragmatic impact of what issues matter and how much. Here are some NNN lease clauses that will require your attention: 

Estoppel Certificate

This requires the tenant to sign and confirm various key aspects of the lease in the instance an investor wants to sell the tenanted property. Or, a lender may ask for an estoppel certificate before approving a loan on the NNN property. Landlords, thus, must have a estoppel certificate clause in the lease; if absent, tenants may negotiate in order to comply when the document is required.  

Approved Use

Such a clause specifies the permitted commercial use(s) of the property by the tenant. NNN landlords should use language that is restrictive so that tenants stay the course with their business operations. This clause is particularly useful for uses in multi-tenant NNN properties like shopping centers.  

Right of First Refusal

A NNN tenant has the right to purchase the property before any other entity if an investor wants to sell it. In other words, if a NNN investor buys a property with an existing right of first refusal, the tenant will have to sign off on it first. Note, this keeps the door open for negotiation by a tenant.

Guarantees

An entity other than the tenant agrees to be responsible for all lease obligations in the instance of tenant default. However, a corporate guarantee is better than a guarantee from a one-member LLC or a sole proprietorship. When NNN leases are guaranteed by a franchisor or an user-operator, this may be worse than having a corporate guarantee. Landlords must do sufficient due diligence and ensure that the guarantor and lease matches the entity whose credit is being evaluated. Guarantors’ credit ratings finances and reputation in other markets should be investigated thoroughly.

Lease Term and Options

NNN leases often have multiple options to extend that could last well over 20 years. Since the options to extend are awarded to the NNN tenant, it provides tenants with leverage when a lease term draws to a close. Strategically speaking, landlords and NNN investors should seek properties for sale with less than 3 years left with no option to extend can be an opportunity to reposition the asset with a higher upside. NNN investors should also be wary of any early termination options or if an option to extend calls for the parties to agree to a new market rate at time of extension.

Call Robert Gamzeh and his team of vigilant advisors to discuss your NNN lease or properties to buy or sell. You can be assured of stellar guidance by calling 202-360-2050.

Using the yield curve to buy NNN properties

Last year, investment volumes dropped significantly across asset classes, and triple-net lease properties
were no exception. Research shows that NNN sales volumes fell over 60% year-over-year in 2023. Next
year, however, NNN investment is expected to rebound!

The yield curve has been inverted since 2022, but research indicates that any economic implosion
following a yield curve inversion is a lagging phenomenon. Investors that take cues from yield curves
consider both: the 10 year-3 month spread as well as the 10-2 year spread, since both yield spreads
have inverted and preceded all six recessions since the 80’s.

Here’s a quick primer on cap rates and yields. Due to higher interest rates, investors have become
increasingly sensitive to yield. It is the primary metric investors are watching in this market. In the bond
market, investors often focus on a bond’s yield to measure a bond’s annualized return. With bond
yields, issuer credit quality is the fundamental risk characteristic that drives pricing. Thus, bonds issued
by investment-grade rated issuers trade at lower yields than bonds issued by non-investment grade
issuers. In the NNN market, investors use capitalization rates (known as “cap rates”) to measure
expected yield on investment. Thus, cap rates are regarded as proxies for bond yields within the NNN
market.

Undoubtedly, over the last twenty five years, net lease cap rates have compressed. However, the
compression has been more modest than the compression of bond yields over the same period. And
even today as bond yields hover around 5%, investment-grade net lease deals are still trading at higher
yields, although now the spread is 1% or less. This puts NNN strategy in a different light.

We are recommending that NNN investors stick tight to core fundamentals in this interest rate
environment. By focusing on net lease assets with investment-grade tenants and strong real estate
profiles, we believe that investors can still create reliable cash flow at higher yields with lower risk. NNN
cap rates are edging up, but since the Fed is likely to ease off higher and longer interest rates hikes, net
lease sellers are pricing this in and keeping prices sticky. Thus, net lease investors could target newly
constructed triple net assets located in strong, gateway markets and minimize re-leasing risk. Or,
consider assets with sale leaseback potential including the car wash, QSR and C-store sectors. Triple net
assets with strong cash flow engines, and capital needs, can tap sale leasebacks to grow fast.

Robert Gamzeh and his team at the Triple Net Investment group pride themselves if offering out-of-the-
box solutions to clients. Uncertain times call for creative solutions. We know NNN markets well enough
to understand the intricacies of financial engineering. Give us a call even if you have engaged an advisor,
202-360-3050.

One big factor impacting the private-capital NNN commercial real estate market is the possible removal of IRS Code Section 1031, which allows NNN landlords to defer capital-gains taxes on the sale of a property by reinvesting the proceeds in a “like-kind” property within 6 months.  The exchanges are an important mechanism for the private-capital marketplace, largely the enclave of wealthy individuals, family offices and boutique private-equity firms seeking to generate cash flow and create inter-generational wealth.

The Biden Administration has proposed ending 1031 exchanges to help fund proposed child care and family-leave legislation. There also are rumors of increasing capital-gains taxes, which would hurt NNN property owners more but would still cut into private-capital profits.  Although this proposal doesn’t appear to completely eliminate the 1031 exchange, it has significant constraints, and most NNN property owners would not be able to take full advantage of the tax break.

The Biden 1031 proposal would treat the exchanges of NNN commercial property used in a trade or business (or investment) similarly to sales of property, resulting in fewer distortions. This revision could increase the progressive nature of the tax and raise revenue for the U.S. Treasury.  Note that this is just a proposal and may not ultimately translate into law.

At present time, owners of appreciated NNN commercial property used in a trade, business or held for investment can defer the capital gain on the exchange of the property for similar property.  As a result, the tax on the capital gain is deferred until a future recognition event, provided that certain conditions are not violated. The proposal would allow the deferral of capital gain up to the amount of $500,000 per taxpayer ($1.0 MM for married individuals filing a joint return) per year for real property exchanges that are “like-kind”. Any capital gains accruing from like-kind exchanges greater than $500,000 (or $1.0MM for married individuals filing a joint return) during a tax year would be recognized by the investor in the year the investor transfers the real property subject to the exchange. The current Biden proposal would likely be effective for 1031 exchanges completed in tax years beyond, Dec. 31, 2021.

Conventional market wisdom is such: if private-capital investors don’t have access to favorable tax treatments like the 1031 exchanges, they are less likely to sell properties in the future. While institutional investors typically focus on IRRs, private-capital investors can hold assets without considering a time horizon. NNN property owners whose cost of capital increases because of higher capital gains taxes likely will hold properties longer.  From a macro-economic perspective, recycling capital by exchanging properties, keeps prices lower and increases deal-flow and, tax revenues are more consistent, yet keeps market liquidity elevated.  This would not happen under current Biden proposal for 1031 exchanges greatly harming at least one-third of the $25 trillion commercial real estate market.

For a smooth and successful transaction with impeccable facilitation for your potential 1031 exchange, reach out to your trusted advisors and 1031 navigators led by Broker Robert Gamzeh at the Triple Net Investment Group.   (We ask our readers to call or write to their congressman and/or senator to vote against the Biden 1031 proposal moving forward in both chambers.)

Goodbye Fuddruckers, California Pizza Kitchen and Chuck E. Cheese! The casual dining industry, has felt the full impact of e-commerce as traditional brick-and-mortar retail. Full-service or casual dining restaurants are revising their business models to adapt to pandemic and post-pandemic trends.  COVID-19 has definitely exacerbated the problems that the weaker brands possess. The pandemic lockdown drives the softening in the casual dining sector which is currently priced at a discount, 50 b.p. discount to the overall NNN net lease market.  In 2020, national cap rates in the casual dining sector increased to 6.60%. This is a 30-basis point increase year over year, from 2019.  The growth in days-on-market, and cap rates have definitely turned bearish for future pricing. In Dec. 2019, 102 NNN triple net casual dining properties were leased to a basket of full-service tenants, average cap rate of 6.59% and 170 days-on-market. As of Dec. 20, 2020 there were 87 properties for sale leased to the comparable tenants with an average list cap rate of 6.72% and 197 days-on-market.

According to industry reports, when the coronavirus pandemic began, casual dining restaurants saw 62 percent less traffic compared to just a 29 percent decrease for fast food or QSR. As the pandemic continues, sales continue to fall for casual dining brands, even as dining rooms open.  As a result, many casual dining brands have set out to rapidly alter their brand to suit the pandemic era and millennials.

At casual dining restaurants, slim margins on food led companies to focus instead on selling more high-margin alcohol. Meanwhile, tech advances in mobile ordering, delivery, or customer loyalty programs drew millennial customers to fast-casual and fast food, QSR restaurants. Delivery services have made eating at home a breeze, and these e-commerce driven sales tend to favor QSR fast casual restaurants.

With a declining customer base, this eroding restaurant sector is poised for further decline. Industry reports note that in a bear case, the best-capitalized restauranteurs can exist for 3-7 months, tops. Some of the largest U.S. casual dining operators, have seen liquidity problems together with troubling performance. Locations without $5 to $7 million in sales do not have the margins to induce lenders or restaurant operators in the current market.  Further, the top 15 largest U.S. casual dining restaurant lenders have reduced their exposure by as much as 20%. Lenders still considering new deals now they seek deals with, more equity, and more stringent covenants.

Casual dining restaurants need to update their value offerings to address food that should be novel, healthy, and delivered fast. Casual dining investors need to distinguish the safe harbor concepts, typically those located in profitable markets, in great locations, and tenants working towards revamping their brand.  Casual dining brands with ongoing business models must take advantage of increased curbside services, speed of service and convenience.  Corporately guarantee leases or large franchisees will remain in strong demand among NNN investment property investors.

In 2021-25, casual dining restaurants should closely mimic that of fast food QSR, as many companies continue to incorporate delivery and novelty menu offerings. NNN triple net lease investors in casual dining will buy brands that address the pandemic’s restrictions well and provide customers with a state of the art, delivery and dining experience.

Per the National Retail Federation’s annual forecast retail sales could grow between 6.1 and 8.0% to more than $5.0 trillion in 2021 as vaccinations increase and the economy reopens.  E-commerce sales are included in this number and are expected to jump rapidly by 15 – 20% to a spike of $1.2 trillion.  According to recent reports analyzed by S&P, 20 major shopping center REITs that have filed reports for calendar 2020, had increased YOY rent collections from 87% to 93%, showing solid improvement in the net lease NNN retail market.  As retailers’ net leases become due for renewal, their term is shrinking, as net lease retailers grapple with unprecedented volatility. About 2.0 billion square feet of retail space will have triple net leases expire this year, and increasingly, landlords are looking to pop-ups as a favorite short-term NNN solution until the retail landscape settles.  Americans spent $800 billion during 2020 on e-commerce, up 30% from 2019, according to data published by the U.S. Census Bureau. That behavior translated to e-commerce accounting for 16% of total retail sales, compared to 12% in 2019. Categories with big spikes included gear for home improvements, groceries, games, toys, sporting goods and musical instruments, etc.

HOT

L Brands will continue to expand its Bath & Body Works chain, opening 49 U.S. stores in 2021.  L Brands is also shifting more Bath & Body Works stores to off-mall locations, where comps are double and operating costs are lower, per investor reports.

Payless is back in the brick-and-mortar business in North America. The discount footwear retailer will open the doors on March 1 to its first store since it filed for bankruptcy protection in 2019, and subsequently closed its 2,500 locations and e-commerce operations in North America. The opening follows the brand’s online relaunch this past summer and is the first of hundreds of stores expected to open during the next five years.

Sephora is going ahead with its largest store expansion plan in its 21-year history. The beauty giant will open more than 50 freestanding stores and 200 locations within Kohl’s stores this year. Sephora will begin to open the standalone stores this month, with locations in TX, TN, FL and CA.

Target plans to expand the Apple shop-in-shops by the end of the fall. Apple products are already sold in Target stores, but the dedicated shops would double the tech giant’s footprint in select stores and expand its offerings.

Planet Fitness, saw a 46% month-over-month increase in visits in January 2021 compared to December 2020, a decrease year-over-year but impressive numbers nonetheless. 

The International Franchise Association estimates more than 26,000 franchised locations will be added this year, an increasing number especially in rural locations, offsetting declines seen in 2020. Rural franchises employment is projected to grow by more than 8%.

NOT

Macy’s executives are making it clear that they are betting on e-commerce to help the department store chain recover from the pandemic. At its earnings report this morning, Macy’s reported that during its fourth quarter, same-store sales were down 17.1% year-over-year, while e-commerce sales were up 21%. Macy’s also managed to report a profit of $170 million, its first quarterly profit in a year.

After closing nearly 250 stores in 2021, Victoria’s Secret will close 30 to 50 more locations this year, parent company L Brands revealed in an investor presentation. 

Smaller malls were struggling even before COVID hit. But as the pandemic caused mandatory shutdowns, shoppers avoided indoor spaces. It should be no surprise that the percentage of all retail loans in special servicing has risen to 35%. Late payments and delinquencies are hitting 12%.

Call your favorite experts at the Triple Net Investment Group for solid, enduring advice on retail NNN investment properties.

Regarding NNN triple net properties, the market and the complexity in deals can present some intricacies that are very hard, without experience.   It is easier and cheaper to instead work with NNN triple net lease advisors who will navigate for and with you.  Here are 7 main reasons to avoid For Sale By Owner NNN properties:

1. Investors should note that the FSBO is trying to get the highest price for their property. Much better than an investor can, your advisor will negotiate a realistic price, make sure there are no unidentified costs and perform due diligence on the property to ensure it is the best investment for you.
2. When you’re looking at an NNN for sale by owner listing, investors have less financing options available typically.  Additionally, when you’re dealing directly with an owner on the sale, you’re likely going to have less room for negotiation. Even if you’re paying all in cash, you may not actually be getting the best deal available on the market.
3. Plus, regarding listings a majority of NNN property owners list with brokers who work in networks so that the property has greatest exposure to qualified buyers. Therefore, it is safe to say, using advisors, a triple net lease investor will have infinitely more choices than on their own. 
4. In triple net for sale by owner listings, the lease terms and terms of sale details are presented poorly at best. When you work with a trusted net lease advisor, they can guide you through the devil in the details with expertise and ensure the elimination of surprises that may be awaiting post-close. Added stress, time, and costly expenses can detract from NNN investor portfolio wealth and financial goals and negate long-term financial success.
5. Another reason to avoid FSBOs is that truly profitable, NNN lease properties sell fast and most, if not many, are never listed openly. Others are very complex and require extensive due diligence. Prospective developers, and new builds also are rarely openly advertised. To locate the right property requires an advisor who knows the market and is reputed in the NNN net lease market. This partnership with a known advisor lends a distinct advantage to NNN investors and maximizes their ROI.
6. When you work with a NNN advisor net lease investors have an expert negotiator on their side who is an expert and can help secure the very best terms on your triple net lease investment. Advisors know what cap rates mean to investors and can advise you on cost-efficient and quick, safer, deals than FSBO.
7. Partnering with a reputable NNN advisor costs the investor, nothing. The fee for services is built into the price of the property being purchased and does not change with the negotiation since it is a fixed percentage usually borne by the seller. So, a whole lot of expertise and risk management on a sizeable dollar transaction, for nothing. That is nothing to sneeze at!

Allow your expert advisors at the Triple Net Investment Group to impart you objective net lease advice, state of the art market education, critical NNN triple net lease investment knowledge, and advocacy with buyers or sellers, and help find an amazing NNN investment that fits your criteria. Call today.

With vaccine progress and the economy gradually reopening, triple net lease investors have steadily returned to the market, albeit with a focus on a smaller, not larger asset pool.  NNN Investors are paying attention to what essential, which implies big box, grocery, drug stores and home improvement.  Cap rates for this type of property hit a low in the final quarter of last year cap rates for single-tenant, big-box space fell to 6.8%, a 20-plus-bp drop, YOY.  Analysts say anecdotally that only the best is trading right now, and investors are shunning gyms, fitness and restaurants.  This market thins out, lacking owners who don’t want to sell them together with buyers who are being skittish of such NNN deals.

Essential-business models, in the NNN space have maintained strong financial positions, and as a result, there is a clear bifurcation in rent collection between non-essential and essential tenants.  Some report that rent collections among multitenant retail and mall properties ranged between 29% – 55%; compare this to 70-85% of essential-business tenants continued rent payments!

From Lowe’s and Kroger to Whole Foods or Sprouts, “essential” big box national retailers attracted most of the investment over the past 18 months. After an aberrant 6 months, transaction volume surged to over $17 billion by Dec 2020. This increase reflects more than 60% of the average $ transactions for 2018, 2019 and 2020.  Even as multitenant properties with strong grocery anchors, became a headache for lenders, sales for essential big box tenants have soared: witness: Target., an essential big-box retailer, reports revenue growth of more than 19% year over year, 2020.

Sales among single-tenant, essential NNN investments properties anchored by big box retailers and pharmacies have highlighted the change in the types of NNN deals that have begun trading since late 2020. Analysts report the preponderance of single-tenant, net-lease NNN sales because of net lease buyers’ growing appetite for quality assets.  As a result, these types of NNN big box essential investments, have demanded significant price premiums.

The grocery sector has been the winner during this pandemic, including Costco, Target, Kroger, Walmart, etc., and a close second, home improvement, Home Depot and Lowes etc.   In 2020, NNN properties with grocery tenants accounted for more than 32% of the market, up 19% from 2019. Tenant quality and financial resiliency will continue to be uppermost with NNN lease investors. In 2020, big box NNN net lease properties were priced 1% lower than their non-investment grade counterparts. However, opportunistic net lease investors should monitor the sector for non-credit big box NNN surprises! Cap rates have ranged from 5%-7.0% across the nation, with the West leading the way and the Mid-west at weakest.

Call the NNN big box experts at the Triple Net Investment Group for the best advice on the deal on your table. With decades of experience and hundreds of millions of dollars of properties successfully transacted for a repeat clientele, you will succeed fast and best for your NNN investment goals this year.

Single tenant NNN properties are specialized properties leased to investment-grade tenants using long-term triple net (NNN) leases. The NNN refers to the triple net lease cost structure, which puts the onus on the tenant to pay (in addition to the rent) insurance, maintenance and property taxes, on the net leased property.  However, these type of NNN investments have their peculiar risks.

Even if the tenant is investment grade, its holding company can set up a separate, subsidiary LLC with a similar name for the purpose of signing a NNN lease. Thus, if the tenant is an entity that has no assets, it shields even the biggest company from honoring a lease.

The more specialized a building is, the greater the amount the next tenant will expect the landlord to contribute in upfront tenant improvements. Typically, single tenant NNN net lease properties are designed and built to meet the requirements of a specific tenant. Re-leasing such a property to a different type of tenant can take a long time and cost a lot more than expected.

Further, single tenant triple net lease properties are either completely occupied, or completely vacant. With a single tenant, if the tenant’s holding company goes out of business or exits, the rent goes away and the NNN investor is left on the hook for the unpaid lease costs.

Landlords need plenty of time to plan single tenant NNN property tenant transition. Otherwise, they may be stuck with an unexpected and costly vacancy. Tenants that don’t wish to renew their lease should give plenty of notice since it is challenging and costly to find a long-term tenant.

Just because a national name is on the sign out front doesn’t mean that the company behind it is going to honor the rents. Even if the property is a “corporate store,” the lessee is typically a subsidiary LLC, and the parent company may not be guaranteeing rent.   NNN single tenant investors need to make sure that if a tenant vacates before the end of the lease, there is an entity on the hook with deep pockets to continue paying the rent through end of term.

Even if a NNN property is located in a high traffic, metro, investors need to pay attention to the location.  Single tenant deals are not location-agnostic propositions just because of an investment-grade tenant.   Plus, even if there is no shortage of suitable tenants to come, single tenant buildings are built to tenant specifics and thus not cheaply transformed.

The value of a single tenant NNN triple net investment property is keenly tied to changes in interest rates.  These properties are like bonds and as they mimic a series of fixed payments over a specified time-frame. On the flipside, just like a bond, when interest rates go up, the value of a single tenant NNN property weakens.  

Your friends and advisors at the Triple Net Investment Group have deep, multiple decades-long experience in consummating single tenant, long-term deals, successfully. Call us today and see how and why our clients for single tenant NNN properties keep returning.

A NNN net lease property is one in which the tenant/s is required to pay all, of the taxes, insurance, and maintenance costs for an investment property.

For most owners of NNN triple net leased investment properties, the safe harbor under Section 199A does not necessarily apply to NNN property leases. But there are provisions that could be an advantage for net lease investors. 

Section 199A, also referred to as the 20% Pass Through Deduction, allows taxpayers to take a deduction for up to 20% of their qualified income from certain rental businesses, business income from partnerships, S Corps, schedule C operations, etc.  In the initial phases of the deduction being implemented, taxpayers did not know whether a rental business qualified as a trade or business.  To clarify matters, Notice 2019-38 was released which identified a safe harbor method under which taxpayers may treat a rental real estate enterprise as a trade or business solely for purposes of Section 199A.

The section 199A safe harbor does not specifically apply to real estate investor/tax payers that own triple net lease properties. In addition, triple NNN net lease ownership does not automatically preclude a 199A deduction. Actually, a rental real estate business can still be treated as a trade or business for the purpose of section 199A if the enterprise otherwise meets the definition of trade or business under IRS Section 162.

If a NNN net lease triple net real estate business, its agents and subcontractors are regularly and continuously involved in the activity of the property, NNN net lease investors may be able to establish that it is a trade or business and is not being operated under a pure NNN lease term. Here is a good example: A NNN Landlord owns and operates commercial rental property in Falls Church, Virginia which is leased by 10 tenants. The Landlord maintains and repairs as needed keep all portions of common areas in good appearance and condition as well as structural upkeep. The Landlord also contracts vendors for the repair and maintenance of property equipment such as the HVAC, boiler, electrical circuits, etc., which serves building and common areas. The Landlord diligently issues Forms 1099 to the contractors for all contracted services.”

Thus, a NNN rental real estate operation may meet the Section 199A safe harbor as long as it meets the following guidelines:

• The taxpayer investor keeps records, including:  1) description of all services performed 2) hours of services performed, 3) who performed the services and 4) dates on which services are performed, plus
• Separate books and records are maintained for each rental operation (and/or the combined business),
• Minimum 250 hours of rental services are performed in the rental real estate business operation claiming such 199A deduction

Your expert advisors at the Triple Net Investment Group have consistently, thoroughly and successfully advised on complicated NNN net lease transactions with tax advantages. Call today, if you are unsure about your current NNN lease property or portfolio’s bedrock value strategies during this pandemic.

The trends of tech and e-commerce due to the pandemic, continue to reshape NNN Investing.  However, here are SIX niches of NNN net lease or triple net properties are and will be resilient through market cycles. Make note.

• DIY/Home Renovation

Home improvement stores saw a huge jump in foot traffic due to the spike in home sales nationally. For example, Home Depot reports a 270% jump with a 133% increase in online sales. Industry reports suggest home renovation has increased by over 63 percent in August 2020 compared to 2019. Lowe’s ecommerce division also reports a shocking 150 percent increase. 

• Grocers

Retail grocers have greatly benefited from being essential in this pandemic since lockdown measures encourage consumers to dine and work from home.  For example, Whole Foods is expanding by 32 new locations by the end of 2021.  All discount grocery retailers are seeing a lift in sales as consumers continue to buy increasing dollars of grocery essentials. LIDL USA is rapidly increasing the number of their small-store concepts, as are Walmart, Kroger, Whole Foods, Albertsons and Aldi.   

• Restaurant

Fast casual restaurants have responded by turning on dime to long-term consumer trends with a huge focus on convenience, delivery and healthy eating. As the industry consolidates around cost, trend and location, there will also be more and better, culled NNN triple net lease investment opportunities. For instance Bojangles, Subway, Jimmy Johns, and Five Guys clearly state that they expect fast casual brands such as theirs, to grab market share from QSR.

• Car Repair

Lowered incomes amongst many demographics including business, stay-at-home and work-from-home routines, are prompting more DIY maintenance and vehicle repair, rather than new vehicle purchase.   Car repair and service retailers are located in highly-trafficked retail areas, which provide convenience for businesses and consumers.  While customer preferences may be changing rapidly, this sector remains the backbone of the economy’s physical goods infrastructure.

• Pharmacy

In an oligopolistic market, a few players dominate this essential and highly resilient NNN net lease market given the undeniable effects of graying demographics of the US population.   Walgreens, CVS and the up and coming Amazon Online pharmacy. Now, pharmacies across the U.S. are also valid federal partners, to distribute free coronavirus vaccines. CVS is focusing on medical services through HealthHUBs and expanding and increasing offerings via MinuteClinic. Walgreens bought VillageMD, a national provider of primary care, and PWNHealth, another branded diagnostics and clinician network.  

• Discount/Dollar

Dollar stores have more locations combined than the country’s top six largest brick-and-mortar grocery and superstore retailers.  The prospects for dollar stores is only getting stronger as other retailers wither.   Dollar stores have a small-box model and most offer NNN triple net lease investors, corporate guaranteed leases with no management responsibility and have national brands with carefully selected, phenomenal locations. Dollar stores target low-income shoppers in rural areas desperate for retail options. In these rural areas, dollar stores lack competition and go where no other retailers will go. 

According to current industry reports, although U.S. auto sales declined nearly 30% from 2019, yet auto repair and parts retailers are thriving.  Auto part and auto service retailers both are greatly benefitting from the fact that car owners are spending more to extend their vehicle’s useful life versus a new purchase.  However, the business model for NNN net lease auto parts is being shaken up by increasing sales of alternative fuel vehicles. As government policies continue to weaken conventional fuel demand, auto parts retailers will consolidate within the industry. It is conceivable that there will be always a market for conventional fuel vehicles their service, but a thinning one.

Currently, Auto part retailers setup in tertiary markets with below-average income, foot traffic, and population and are popular with DIY and DIFM customers.  With the advent of AI and electric cars, auto service retailers are experiencing a spike in business at the expense of auto parts retailers.  Auto parts retails occupy very conventional buildings, a huge boon for current and medium-term NNN triple net lease landlords, for vacancy and transitions. On the other hand, auto service retail uses upto 10,000 s.f. buildings which are highly specialized for their hvac, electrical and build out.

Alternative fuel vehicle sales are on the increase as consumers and businesses continue to crave greater fuel efficiency fueled by environmental concerns and vehicles operating costs.  However, a complete transition to alternative fuel vehicles is decades away to say the least.  Of the approximately 168,000 gas stations in the United States less than 40 percent, or 66,000 gas stations, also have convenience store businesses. Fuel sales account for more than 60 percent of total sales, which means that consumers are primarily purchasing gas for their cars and not convenience goods such as coffee, cigarettes and food. Real estate is all about location. Repurposing gas stations will depend on so many factors, such as urban versus suburban; primary/secondary streets versus highway locations etc. What are the current uses of the adjacent properties? Most importantly, the success of gas station repositioning will depend on the creativity of the developer.

By 2030, it is estimated that there will be over 50 million electric vehicles sold by carmakers, and by 2035 there will be about 35 million electric vehicles on U.S. roads. Amazon recently ordered 200,000 electric delivery vans, and today, about 20% of the world’s buses are alternative fuel. California has even mandated that by 2032 all buses purchased by its mass transit agencies be zero-emission. Gas stations have been declining for decades — in the mid-90s there were more than 250,000 gas stations and by 2019 over 60,000 had closed, a 25% reduction. This decline is attributed to other factors that have nothing to do with the economic vitality of operating a gas station. However, as demand for fuel continues to decline as electric vehicles are sold to the masses, one can reasonably expect than 65% of gas stations will close by 2030, and by 2050 the gas station concept will only be found in phonebooks lining erstwhile payphone booths.

Presently, Auto service retailers rely on nearby stores for foot traffic but are typically found near big-boxes without a storefront, however auto part retailers exist in secondary markets where the rents are more affordable.  For NNN net lease triple net investors, both types of auto retailers currently offer corporate guarantees and are well known for upto 20 year leases. Most auto part leases stay flat for the first 7-10 years but auto service lease terms see rent escalations every 3-5 years, from 2.0% to 5.5%.  Car part retailers tenants such as Advance, AutoZone or O’Reilly often trade between the 5.00% to 5.65% cap whilst 10-17 -year auto service retailers like Jiffy Lube or Valvoline, Midas Muffler, etc, will trade for cap rates ranging from 5.50% to 5.75%.  However, lease terms, rent escalations, cap rates are bound to change negatively, as auto parts business models morph.  The NNN net lease auto service business looks to be more robust than auto parts for the long term, though.