The Popularity of NNN Deals
Single-tenant, triple net (NNN) deals have become one of the most prevalent and often traded types in commercial real estate. However, despite the popularity, triple net deal structures are still commonly misunderstood by many commercial real estate practitioners.
Triple net deals usually offer new, or nearly new real estate and are generally secured by long-term leases to national tenants. In addition to rent, an NNN tenant is responsible for operating expenses, or the “net” amount of three costs: real estate taxes, insurance and maintenance. (In other commercial property transactions, these costs would usually be the responsibly of the owner or landlord.)
NNN deals are appealing to all types of investors because they offer stable cash flows, attractive financing and unique tax benefits.
Characteristics of a Triple Net Investment
NNN investments are usually secured by long-term leases of 10 to 20 years and offer low risk with a steady monthly income stream. Typically, the long-term tenant is responsible for all maintenance and upkeep of the property with little, if any, responsibilities left to the investor. This makes NNN deals an attractive option for investors who lack time or experience to manage commercial real estate or who may be looking for a better return than is available in their specific market area.
NNN investments vary in price points from as little as $500,000 for a property leased by a small company or franchise up to $20 million for big-box retailers and similar properties. This investment type can include office buildings, malls, industrial parks or freestanding buildings.
Cap rates for NNN deals typically start at 5% for the highest-rated tenants with choice real estate and range up to 9% for tenants with lower credit ratings and non-traditional lease structures.
The Triple Net Benefits
NNN deals offer many benefits to investors, including providing a long-term solution to allow investors to meet their goals despite short-term market instability. The primary benefits that NNN deals should include are:
- Long-term lease secured by stable, credit tenant with national recognition
- Minimal management responsibilities
- Clear description of who is responsible for each expense
- All expenses should be payable by the tenant
- Scheduled rental increases over the life of the lease
- A clear understanding of any lease options
- An assessment of the underlying real estate and its residual value and usefulness at the end of the primary term
Challenges Associated with NNN Leased Properties
Just like all other investment types, there are certain risks and disadvantages that go along with NNN leased properties. They generally do not offer much of an opportunity for short-term profit, and they are less liquid than other types of investments. There is also the remote possibility that the tenant could go out of business, be acquired or merge with a competitor, leaving the building dark.
Even if the tenant has strong credit, the type of business may affect investment value. For instance, a general-purpose use—where tenant improvements are easily convertible to another tenant’s needs—is more desirable than a special use building with limited utility for future tenants. Fast food uses are one example of this issue, but certainly not the only one. Despite these possible risks, NNN investments offer a unique combination of market advantage and financial reward that makes them attractive to many investors.
If you want the best return available in your market, then you should consider this type of commercial real estate investment. Please feel free to reach out to me or one of our commercial advisors for questions or more information.
Ben Graham, CCIM can be reached at (225) 329-0268 or bgraham@stirlingprop.com.
