For investors, finding the right tenant to occupy an NNN property investment property is critical to its success. NNN tenants span the property spectrum, including office and industrial, but most commonly NNN lease property investments are in retail, which includes fast-food restaurants (Burger King, McDonald’s), grocers (Walmart, Giant, Albertsons, Publix, Whole Food) convenience stores/gas stations (Sheetz, Wawa, Pilot, etc) and big-box stores like Target, IKEA, Kohl’s, Macys, Lord & Taylor etc.
Let’s look at the factors which are essential in understanding which type of NNN property tenant to consider:
CAP RATES/RISK: Asking prices for Triple Net properties are typically quoted based on a capitalization or “cap” rate, which is determined by dividing the property’s annual net operating income or NOI, by the purchase price. Generally, riskier investments trade for higher cap rates, while more stable investments trade based on lower cap rates.
CREDIT RATINGS: In general for NNN lease properties, a good choice is a nationally recognized tenant with little or no debt, or, with an investment-grade (BBB- or better) credit rating from one of the three major credit rating agencies – Moody’s, Zack’s, or S&P. Larger or public companies are often assigned a credit rating by a credit agency. Credit ratings represent the likelihood of a company defaulting on its financial obligations. If private tenants are being evaluated, then investors should definitely consider:
- Tenant Credit Report: Request and review Tenant credit profiles from one or more of these types of reporting agencies: D&B, Equifax Small Business Enterprise, Accurint Business, and ClientChecker;
- Tenant Business Plan
- Tenant Sales History
- Tenant Annual Financial Reports and AuditedTax Returns
- Tenant Certified, Personal Tax returns
Perhaps the most important factor when considering a Triple Net NNN property investment is the credit quality of the tenant – which is largely attributable to the tenant’s ability to pay rent over the course of its lease(NNN property brokers). All else being equal, properties occupied by strong tenants with investment-grade ratings generally trade for lower cap rates than those with non-investment grade tenants.
PARENT GUARANTEES: In addition to credit ratings, NNN property investors should look for a lease that has a guarantee from the parent corporation. For example, X is a subsidiary of Y. X may be a good tenant in its own right, but with a lease backed by the parent, Y, the investor will be better off. In order to ensure that the parent company guarantee will hold up in court, consider the following:
· Obtain an authorized guarantee agreement from the parent company. Doing so means that if for any reason the original tenant assigns the lease to a new tenant, the parent company can also be held responsible for ensuring the new tenant is also obligated to carry out the conditions of the lease;
· The parent company should use the phrase “primary obligation” when describing the guarantee. By adding this phrase, a tenant’s obligation to pay rent converts into a primary obligation for the tenant’s parent company;
· There must be actual wording in the lease from the parent company that states they obligate themselves to pay the rent and meet other lease obligations.
MARKET CYCLE RESILIENCE: Examining tenant companies that remains strong in most market cycles is another way to mitigate risk. For example, should a recession hit the United States, most people may save some cash by skipping their Starbucks coffee, but most will still refill their prescriptions. A rule of thumb: look for a tenant that sells a necessity product that is positioned to survive market downturns, such as a healthcare tenant like CVS, or Walgreens, or a Grocery tenant like Aldi’s, Walmart, Kroger, etc.
Get the guidance of top-rank NNN property brokers at the Triple Net Investment Property Group, today, to make a market-savvy decision on the best tenants for your NNN property investment.
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