Triple Net Leases are considered as one of the most common types of commercial real estate lease. They’re also known as NNN lease, and they are usually Single-Tenant retail properties where the tenant is liable for all the expenses, insurance, and maintenance costs.
When you first look at an NNN lease, the property deal often seems to be an ideal investment choice. That’s because these properties have no management liabilities, provide stable cash-flow and offer appealing financing and tax options. What’s more, a good Triple Net Lease Single-Tenant commercial property usually comes with an already active long-term lease with a proven, reliable tenant.
Thanks to numerous advantages that NNN properties offer, there is a high demand from investors who want guaranteed income and no management liabilities. But, even if Triple Net Lease properties seem like an ideal investment opportunity, whenever investors think of starting an investment portfolio, they need to pay attention to certain risks that underlie the investment.
But let’s start on a more positive note.
As an investor in a Single-Tenant commercial property with an active NNN Lease tenant, you’ll be mainly focused on these benefits:
- No Expenses – With a Triple Net Lease, the tenant is liable for all property taxes, insurance, and operating expenses. This means that you, as the landlord, are free from any expenses and administrative duties. This is what makes this type of lease unique among the many different lease agreements.
- Predictable Income – Since the tenant is liable for all property expenses, the investor’s cash flow is unaffected by expense fluctuations. To be exact, the rental income will actually be the cash flow, regardless of the expenses (unless the tenant vacates outside of the agreement).
- Stability – With their long-term lease agreements, NNN properties are considered to be very stable assets. Since they are located in a visible shopping area with a lot of traffic (and often in proximity to large companies), these leases are often signed by regional or national tenants. This high “tenant quality” decreases the likelihood that they would be unable to pay rent or leave the property outside of the agreement.
- Indirect Investment Diversification – NNN lease properties offer many benefits just like other types of investments, but commercial real estate returns do not usually correspond with stocks. An NNN property provides diversification benefits to investment portfolios. Think of it this way: If an industry has a predictable growth rate, and you own an NNN property leased to such an industry, you indirectly benefit from its growth.
- Depreciation- It protects some of the cash flow from Triple Net Leases and many of them have increases in their leases that lead to higher appreciation in the future when sold.
- Financing- Triple Net Lease properties are easily financed by major lenders. Banks love the stability of these assets and provide financing easily. By analyzing the future cash flows, banks determine which investors are suitable for a bank loan. Triple Nets provide steady and predictable income and have reliable tenants, so that’s why lenders consider these properties trustworthy borrowers.
Apart from these essential benefits, there are some other benefits to consider.
- Tenant Property Control – Tenants have most of the property management responsibility. In a Triple Net Lease, it is the tenant who is responsible for daily management of the property, and thus the tenant feels more like an owner than a tenant. This leaves you, the investor, with no property management headaches at all.
- Tenants Keep Costs Down – When the tenants pay the lower rent in the NNN lease structure, they also agree to cover higher repair and maintenance costs when needed. Tenants are motivated to keep maintenance in check. This also leaves you, the investor, with no maintenance costs. More importantly, you have a control mechanism to make sure tenants take very good care of your property.
If you want to get more familiar with Triple Net Lease Properties, check this article: The Ultimate Guide To Triple Net Lease Properties.
Because of the many benefits Triple Net Lease properties have, investors consider them as an attractive investment option. As we’ve mentioned above, this investment type generates constant income with only minor management obligations. The investor’s job is just to bring the money.
However, this investment type also carries its own risks. Let’s take a look at some potential risks Triple Net Lease properties might have.
Risks Of Investing In Triple Net Lease Properties
- All Credits Are Not Equal- When the credit rating of the tenant falls, the property price also falls. The credit rating falls under three rating firms: Standard and Poor’s, Moody’s and Fitch; BBB and higher (investment grade). But even with an investment grade credit rating, the property is not risk-free. Since investing in these properties means investing in physical assets and (in a way) in the tenant who settles on the property, it is important to note that tenants with investment grade credit rating are less likely to fail and not to pay rent. An unstable tenant is a risk in an NNN lease.
- Tenant’s Have Rights – Before leasing a property, make sure to do your due diligence. The specific property’s past history and future prospects have a lot to do with long-term success. For instance, some drug stores with aging demographics may be regarded as an in-growing industry. While some of these stores are considered superior, though, others have had problems in the past (and changed ownership). These have a higher level of risk.
- Current Rental Rates – Current rental rates which are above the market standard may be considered as a disadvantage. Bear in mind that, when a tenant vacates, space will be backfilled at the prevailing market rate. In cases where the lease rate is far above the market rate, take note of the tenant’s credit and the remaining lease term. A property with a tenant with strong credit and a long remaining term may be more attractive than a property with a tenant with marginal credit and a short remaining term.
- It’s Either Leased Or It’s Not – NNN properties with one tenant rely only on that tenant for cash flow. Therefore, the property it is fully leased or it is not leased at all. Highly specialized properties often have difficulties in backfilling or adapting for different purposes.
Considering the benefits and the risks we’ve mentioned above, investing in Triple Net Lease properties can be quite appealing for investors looking to generate steady income with little or no management responsibilities at all. Yet, like all investments, they are not risk-free so you should do your due diligence before investing.
Many investors find NNN properties as an attractive investment opportunity since there have many of the side benefits other investments have. Single-tenant commercial Triple Net Lease properties are very stable, with long-term leases and are great income opportunity for anyone who wants stable cash flow and little to no management and maintenance involvement.
However, investors should not ignore the fact that each triple net investment property carries a certain amount of risk. That’s why they should take into account the potential risks we’ve mentioned above.
If you are considering investing in Triple Net Lease commercial properties and looking for someone to do all the legwork for you, don’t hesitate to contact us. Westwood works as a Buyer’s Agent for commercial properties, specializing in 1031 Exchange NNN Retail properties. Buyer’s agents are paid by the seller of the property, so our service is free of charge for you, the buyer.
If you want to learn more about the responsibilities of a solid Buyer’s Agent and how it can help you close the best deal, check this article: “How Buyer’s Agents Help You Make The Right Commercial Property Investment”.
Note: Westwood Net Lease Advisors does not charge the buyer for its services.