When Buying Net Lease Property what criteria should I focus on?

A NNN property lease is highly attractive to investors as it affords a stable income, and it minimizes the property management cost and risk for the landlord. Tenants are responsible for most or all of the operating expenses, and investors can be as hands-off as they want. 

When evaluating NNN property investments, it is mission-critical to consider the following:

1.    Lease term: NNN lease properties lease terms can last 10-15 years, or longer. For example, if a triple net lease with ten or fifteen years still left in the lease, market risk is highly mitigated, as long as the tenants are strong, and a good tenant guarantee is in place.   However, if a mom and pop franchise tenant the property and there are only 3 years left on the lease… then the investor owns a low-value, property that other investors will view as high risk.

2.    Corporate Guarantee: A strong triple net lease NNN property should be backed by a corporate guarantee from the parent corporation with particular clauses and language regarding primary obligation and an authorized guarantee agreement.  

3.    Lease Clauses: due diligence on the entire lease is key.  E.g. termination clauses give the tenant the right to terminate the lease (generally without penalty) at a specified point in time.   Other provisions give the tenant the right to terminate the lease early. Often, there are multiple options that give the tenant the right to renew/extend the lease by three or five years at a time with a specified rent increase or decrease.

4.    Tenant Credit: even if tenants have a great credit rating, it’s worth analyzing the health of their industry to predict whether their business will remain stable, or grow.  Also, many corporate tenants have a franchise model, and this means buying a property with minimal capitalization.

5.    Location: to tenant or re-tenant a property, it is easiest to do so with a well-located NNN property measured by:

• Traffic Counts (many retailers and restaurants require a minimum number of vehicles to pass the site each day)
• Demographic data (age, income, gender, etc. statistics)
• Population density (within 1,3 or 5-mile radius)
• Accessibility (due to medians, curb cuts, etc.)
• Visibility (from passing traffic)

6.    Debt on the Property: NNN investment properties may carry long-term debt that cannot be paid off early without penalties.  Sometimes there are assumption clauses that allow a new borrower to assume the existing debt, for fees(1031 Exchange Needs).

7.    Building Lot:  Having an appropriately sized property is a huge investment factor.  Many NNN tenants require a minimum parking ratio before they will consider a location. Certain retail, restaurant and medical tenants have needs that far exceed minimum standards established by city code(Net Lease Properties, NNN properties lease terms). Excess land gives the investor options to either expand the current building or to subdivide the land and construct an additional building or, sell off the excess parcel.  Also, certain buildings are very easy to convert to alternate uses, for e.g. Dollar stores, auto parts stores, and many fast-food restaurants. 

8.    1031 Exchange Needs: if the investor is in dire need of a 1031 exchange into a NNN property, then understanding the process and, having the time, access to resources, and identified, proven expert accountants, lawyers, and brokers is key, as well(Triple Net Investment Group).

Call on your favorite brokers and advisors for NNN property investment at the Triple Net Investment Group, today, for ensuring an effective, and profitable purchase or sale.