The value of NNN real estate as commercial income property is based on the financial security of the tenant. If the tenant can meet the terms of the lease, paying the property tax, insurance premiums, and maintenance fees for the property in addition to rent and utilities, the owner can profit handsomely. If the tenant is unable to meet these obligations, the owner may end up with a vacant property that is difficult to lease to another type of business.
Evaluating a tenant’s credit rating is one way to prevent this situation from happening. At least three organizations issue reputable credit ratings for public companies: Standard and Poor’s (S&P), Moody’s, and Fitch. For grading investment properties, S&P is often the most trusted rating.
The Importance of Credit Ratings In NNN Real Estate
S&P assigns credit ratings that range from “AAA,” which signifies an “extremely strong capacity to meet financial commitments, to “D,” which indicates “payment default on financial commitments.” Investment grade properties have a rating of “BBB” or higher. A BBB rating indicates that a company has “adequate capacity to meet financial commitments, but [is] more subject to adverse economic conditions.”
S&P is quick to point out that credit ratings are not intended as a measure of investment merit, but the organization uses the “likelihood of default” as the most important factor in its “assessment of credit worthiness.” Because the value of commercial income property depends on the ability of tenants to meet their financial obligations, a tenant’s credit rating predicts the value of an NNN real estate investment to the degree that it reflects the financial stability of the tenant.
Making a Sound Investment
The credit rating of the tenant is one aspect of an NNN real estate property’s investment value. The value of the property is also based on its condition, location, and whether legalities such as easements, restrictions, and encroachments affect what you can do with the real estate in the future, among other concerns.
Because assessing the value of NNN real estate property can be complex, it is important to consult an experienced real estate broker such as Westwood Net Lease Advisors before you make a purchase. Using our in depth knowledge of the NNN market and access to thousands of on-market and off-market properties, we will help you find property that meets your financial goals and expectations as a property owner.