A “popular” real estate investment these days are the “triple net” or “NNN” deals.
NNN deals are typically single-tenant retail properties leased to certain retail tenants that generally have a high credit rating. The tenants are usually liable pursuant to the lease for all of the property’s expenses, both fixed and operating. These investments are typically new or nearly new, have no management responsibilities, a long term lease to a quality tenant, stable cash flow, attractive financing, and tax benefits of owning real estate.
There are many questions that one needs to ask in deciding whether to move forward with a NNN acquisition. Here are some:
1. What is the Tenant’s financial strength (i.e its Credit rating)?
Understand the tenant and its business model. Examine the number of stores, debt to equity ratios, stability of management, and general outlook of the tenant’s industry.
2. Does this particular retail store have the corporate guaranty behind it?
This is critical to financing the acquisition and the ability to sell the property down the road.
3. What is the length and strength of the Lease?
Examining how many years are left on the lease and what type of terms the lease contains are critical items that need to be examined during due diligence. Have an attorney review and comment on any proposed lease, as the terms of the lease are critical to the success of the investment.
4. Am I going to get a strong rate of return on my investment versus the rent being generated by the store?
This is a straight-forward calculation. However, it leads to other questions.
5. Is the rent being paid by the tenant inflated, or is it market rate?
This is very important should you have to re-rent the space after the tenant leaves. The main reason is that you don’t own the tenant, you own the income stream, so you have to make sure the income stream is not over-inflated.
6. Is the location right for the store?
Regardless of the tenant’s credit rating, a NNN investment still comes down to this basic question. Local market conditions will dictate whether the location is correct.
NNN deals can be solid assets in a real estate portfolio, and can help build wealth over the long term. But, you must do your homework, understand the risks and overall marketability of the asset, and come to your conclusion accordingly.