NNN properties are excellent vehicles for adding a passive income stream to your portfolio, however, like all properties, you still need to do your due diligence to ensure you get a good deal.
But once you’ve found a few properties to choose from, how do you decide which one is a better investment?
One of the simplest ways to not only evaluate an NNN property but also compare it to other NNN properties is to examine these three factors:
Are They High-Quality Tenants?
Even if you determine a tenant to be a high-quality tenant, it’s still important the tenant be as financially solvent as possible.
Many investors will only accept tenants that are at least subsidiaries of a parent corp, which means there a several hundred stores backing the lease, or a large franchise that has been around for at least 15 years.
While franchises are slightly riskier, as long as the franchise has a good credit rating (minimum BBB) and has between 50 to 100 stores, then they can be considered stable enough to avoid serious risk and provide a good income.
The two asset types you should avoid are small franchises, and mom and pop stores. These types of businesses are best left to experienced investors who are able to evaluate them despite the fact that they are not investment-grade tenants.
Is There A Parent Corporate Guarantee?
A strong triple net lease property should be backed by a corporate guarantee from the parent corporation. In order to ensure that the parent company guarantee will hold up in court, you need to verify three factors.
One, there must be actual wording in the lease from the parent company that states they obligate themselves to pay the rent and carries out any obligations stated in the lease.
Second, the parent company should use the phrase “primary obligation” when describing the guarantee. Normally the parent company’s obligation to pay rent is a secondary obligation; the addition of this phrase converts the tenant’s obligation to pay rent into a primary obligation for the company.
And last, you’ll want to try and get the parent company to sign an authorized guarantee agreement. Doing so means that if for any reason the original tenant transfers 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 named in the lease.
What Type Of Lease Does The Property Have?
Net lease properties can be single net, NN, or NNN leases. While triple net leases are excellent for investors who aren’t interested in managing a property, the fact that it is a triple net lease isn’t enough to guarantee you a home run.
Since triple nets are tied to who is behind the lease and how long the lease term is, you need to take these into account along with all the factors above.
For example, if you have a triple net lease with ten or fifteen years still left in the lease, it won’t really matter how the CRE market is doing, as long as the tenants are strong, and you have a good guarantee. You’ll still be able to sell the property, do a 1031 exchange, and invest in another profitable property.
However, if you have a mom and pop franchise on the property and only a few years left on the lease… then you’ve placed yourself in the position of owning a low-value property that other investors will view as too risky.
This problem is only compounded when you take on short-term debt and end up overpaying for an income stream with weak tenants and an unguaranteed lease.
However, if tenants are at lease moderately strong, and you’re able to secure a corporate guarantee, then you have a lot more flexibility in how you handle the property, and how it affects your portfolio, in the future.