Have you heard about NNN lease investments? Regardless of your level of commercial real estate (CRE) experience, you may not be aware of the unique benefits and security that triple net lease properties offer — they are truly one of the most stable income-producing investment options available.
So what is a NNN lease investment and why should you add one to your investment strategy?
Understanding “NNN” Lease Investments
NNN is the abbreviation for a “triple net” lease. When you purchase a commercial building and/or the land it sits on and lease it back to a single tenant who agrees to pay net taxes, net insurance, and net property maintenance, as well as rent, utilities, and most other expenses, that is a NNN lease. These creditworthy tenants tend to be essential retailers, dollar stores, fast-food restaurants, gas station c-store combos, drug stores, and medical companies with investment-grade S&P and Moody ratings.
Types of Triple Net Leases
There are two types of triple net leases: absolute NNN and regular NNN. A big misunderstanding in the NNN market is that all triple net leases are absolute NNN, which is simply not the case.
Absolute NNN Lease
An absolute NNN lease is a long-term, corporate-guaranteed lease (10 to 20+ years) between the landlord (you) and a creditworthy tenant who pays all expenses associated with the property. These costs include real estate taxes, insurance, common area maintenance (CAM), and other expenses, such as capital expenditures. In an absolute triple net lease, the tenant assumes all financial risk while you own the property with zero responsibilities; simply collect rent and live your life.
Tenants that like to operate with absolute NNN leases are typically investment-grade corporations such as Dollar General, Walgreens, and Taco Bell. They want full control over their brand and image, so they take care of the properties as if they own them. Absolute NNN leases make it easy to own a triple net property anywhere in America without worry.
Regular NNN Lease
A regular NNN lease is also a long-term lease that still includes paying 100% of the taxes, insurance, and common area maintenance but may not include ALL expenses. These corporate-guaranteed leases from companies like Starbucks, Auto Zone, DaVita, and others, may have clauses that require the landlord to cover expenses such as parking lot, roof, and structure, in which case the landlord bears some responsibility, though minimal.
Even though a regular triple net lease property may require some maintenance costs, it’s still a stable, income-producing investment that can be owned in any state, no matter where you live.
NNN Ground Lease
A NNN ground lease is a land-only rental from 20 to 99 years. As the investor, you have fee-simple ownership, holding the title on the property. Just like with an absolute NNN lease, the tenant is responsible for all expenses related to the development and improvement of the property, taxes, repair and maintenance, insurance, and financing costs.
In regards to the lease, there should be a lease clause that gives you possession of the building if it is canceled early. This provision helps ensure the terms of the lease are fulfilled, and in the end, if the tenant vacates, the building and improvements that make the property more valuable, become yours. In this case, you not only own land that may have appreciated but you also own a building that’s re-tenantable.
NNN Leases & Sale-Leasebacks
It is also important to understand most major corporations that operate with a triple net lease have a non-negotiable form lease that they use in every state across the nation. The only exception would be a sale-leaseback. Sale-leasebacks are most common with fast-food franchisees, gas stations, and businesses like manufacturing and industrial. In a sale-leaseback, as the property owner or “landlord” on the lease, you will draft the terms of the lease with the help of an experienced NNN lease attorney.
Which Businesses Use a Triple Net Lease?
Triple net lease properties are typically recession-proof, pandemic-proof businesses tied to lifestyle trends and necessity versus those tied solely to economic cycles. NNN tenants commonly fit the three most important triple net investing criteria – tenant creditworthiness, a high-quality location, and lease type/duration – and have proven, even in the toughest economic times, their ability to stay profitable. Though most NNN properties are tenanted by multibillion-dollar brands, some are also manufacturing, industrial, and other types of businesses.
Businesses that commonly use NNN leases:
- Auto parts stores
- Convenience stores
- Child care/early learning centers
- Car washes
- Dollar stores
- Drug stores
- Fast-food restaurants
- Gas stations
- Medical clinics
- Pet & veterinary clinics
- Quick-service restaurants (QSRs)
NNN Lease Investment Benefits
There are many benefits to owning a NNN lease investment that are not available in stock market investing or with other CRE investments, like gross lease apartments and office space.
Triple net property tenants are significantly less likely to default, greatly reducing owner risk. NNN investments’ value is not susceptible to wide swings and daily fluctuations, and you receive worry-free, consistent, stable monthly income that escalates over the course of the lease term. Then there are the annual tax opportunities and the 1031 exchange tax code, which can increase the value of your investment even more.
Triple Net Financial & Lifestyle Advantages
- Low barrier to entry: many NNNs are priced around $1M
- Reliable, relatively low-risk investment that provides long-term monthly income
- Passive, predictable income shaped to fit financial, lifestyle, and geographical preferences
- A billion-dollar corporation tenanting your investment lowers ownership risk
- 10 to 20+ years of reliable income with little to no landlord responsibility, as guaranteed by the lease
- Periodic rent escalations that help cover inflation or any unexpected costs
- Prime location: tenant opens where demographically successful for their business, resulting in predictable sales and less risk of having to re-tenant
- Tangible asset that adds value to any portfolio, as well as possible leverage and great resale value
- Tax opportunities, such as the 1031 exchange and cost segregation depreciation, help increase your internal rate of return to that realized by other investments
- Diversifying by location, tenant type, asset class, lease type, and cap rate helps to build wealth
- Enjoy lifestyle and financial freedom without actively managing properties
With the tax opportunities, rent escalations, possible leverage, the value of the tangible asset, and financing terms, your internal rate of return (IRR) can be as much as 7–10% or more, which is in line with gross lease investments and stock market returns without the headaches.
Are There Any Drawbacks to NNN Investments?
If you like to “manage” properties, one drawback would be the lack of property management. Since NNN tenants take care of CAM, other than possible roof, structure, and parking lot responsibilities, as the landlord, there is very little to do.
Another drawback for you might be that the rent is capped by the lease for a specified amount of time. However, some tenants offer annual rent increases, while others offer increases every five years, and so on. These increases can be as much as ten percent, depending on the corporation that’s renting the property. When you factor in the lack of maintenance and management, tax advantages, and the value of the land, the rent cap doesn’t end up being much of a factor in the internal rate of return.
Since triple nets have a fairly low barrier to entry, we have investors come from a wide variety of backgrounds seeking the long-term, high-credit, passive nature of NNN properties. — Jason Simon, Vice President, Westwood Net Lease Advisors
To Wrap it Up – NNN Investments Offer Security Not Found in Other Investments
Now that you know what a NNN lease investment is, you might be thinking it sounds too good to be true. Westwood Net Lease Advisors assure you that what you see is what you get. NNN investments are straightforward, easy to own, income-producing, profitable investments that offer a level of security not found in other investments.
Whether you buy with all cash, obtain debt to purchase, or if you’re looking to use a 1031 exchange to trade high-maintenance properties for something less time-consuming and virtually expense-free, NNN lease properties are one of the best investment options available.
If you’re ready to learn more, contact our team today for a no-obligation conversation about how low-risk triple net lease investments can help you build wealth. We walk you through the process from before the property search through closing and thereafter, at no cost to you. 314-997-5227
