The Popularity of NNN Deals
Single tenant, triple net deals have become one of the most popular and often traded types in commercial real estate. These deals usually offer new, or nearly new, real estate and are generally secured by long term NNN leases to national tenants, where the tenant is responsible for real estate taxes, insurance and all maintenance. NNN deals offer stable cash flows, attractive financing and unique tax benefits making them attractive to all types of investors.
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Characteristics of a Triple Net Investment
NNN investments are usually secured by long term leases of 10 to 20 years and offer stable positive cash flows. Usually the long-term tenant is responsible for maintenance and upkeep of the property with little, if any responsibilities left to the investor. This makes NNN deals an attractive option for investors who lack time or experience to manage commercial real estate or who may be looking for a better return than is available in their specific market area. NNN investments vary in price points from as little as $500,000 for a property leased by a small company or franchise up to $20 million for big box retailers and similar properties. Cap rates for NNN deals typically start at 5% for the highest rated tenants with choice real estate and range up to 9% for tenants with lower credit ratings and non-traditional lease structures.
The Triple Net Benefits
NNN deals offer many benefits to investors including providing a long-term solution to allow investors to meet their goals despite short-term market instability. The primary benefits that NNN deals should include are:
- Long term lease secured by stable, credit tenant with national recognition
- Minimal management responsibilities
- Clear description of who is responsible for each expense
- All expenses should be payable by the tenant
- Scheduled rental increases over the life of the lease
- A clear understanding of any lease options
- An assessment of the underlying real estate and its residual value and usefulness at the end of the primary term
Challanges Associated with NNN Leased Properties
Just like all investment types, there are certain risks and disadvantages that go along with NNN leased properties. They are generally do not offer much of an opportunity for short term profit and they are less liquid than other types of investments. There is also the remote possibility that the tenant could go out of business, be acquired or merge with a competitor leaving the building dark. Even if the tenant has strong credit, the type of business may affect investment value. For instance, a general-purpose use, where tenant improvements easily are convertible to another tenant’s needs, is more desirable than a special-use building with limited utility for future tenants. Fast food uses are one example of this issue, but certainly not the only one. Despite these possible risks, NNN investments offer a unique combination of market advantage and financial reward that makes them attractive to many investors. In my next article, I will review different types of NNN investments that are popular in the market place.
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About Ben Graham –Ben is a Partner and Managing Director Director for SVN | GLL. He draws on more than 15 years of experience in commercial real estate to create results, and is nationally recognized as a leader in tenant representation. This experience, combined with his finance and valuation background, offers each client a comprehensive evaluation which assures that the best solution is developed and implemented. Ben Specializes in retail and office leasing and sales, and has represented local, national and international clients. If you would like to contact Ben, you can call him at 225-367-1515, email him at firstname.lastname@example.org or follow him on Twitter at @svngll.