What is an NNN?

A triple net (or NNN) leased property is typically a free-standing building that is leased and occupied by one user, or company, most often a retail tenant. The most common type of tenants are well known brand named retailers such as Walgreens, CVS, Starbucks, McDonalds, Wells Fargo and Dollar General, as well as a host of lesser known but financially strong such as  xxxx, xxx and xxxx.

The tenant is usually committed to a long term lease of ten years or more with increasing rent due over the term of the lease.  The NNN descriptor indicates that the tenant is responsible for paying their rent, plus some or all of the operating expenses such as taxes, insurance, utilities and maintenance – hence the term “Net Net Net or NNN”.  This type of lease is mostly, but not all passive since lease renewals, financing and sales of the property fall to the owner.  One of the main benefits of most NNN properties is that you collect a rent check each month, and the tenant takes care of most, if not all,  of the typical hassles of property ownership and maintenance.

One of the many benefits investing in single tenant net leased properties is that they typically provide a steady and dependable cash flow. This is because of the long-term nature of the lease AND the strong credit of the tenant.  Large well capitalized publicly traded companies may go bankrupt and fail to pay their rent, — this is possible but not likely.

While a strong tenant is certainly important, the property’s location should be an investors’ most important criterion. Over time, a property with an excellent location and average tenant will usually perform better than an average location with a great tenant.  Fortunately, most of the NNN leased properties occupied by major retail tenants have excellent locations, as these retail companies are very selective in determining where to put their store locations.

The most important considerations to be evaluated in a NNN property include:

Location – on a prime corner with high traffic counts for example

Property – The type and quality of the building is important to consider as it impacts the likelihood of lease renewal by the tenant, and also increases your ability to place new tenants in case the lease is not renewed.

Tenant – Who is the tenant, hopefully a publicly traded company with a high credit grade? It is important to distinguish between corporately guaranteed leases vs franchise backed leases. A lease by an individual who is operating a franchised owned fast food location will be much less secure than one owned and leased by the corporation.
Lease terms – The ideal lease is long term, have regularly scheduled increase and free from early termination clauses. For example, recent Starbucks leases have termination clauses in them with modest “penalty” payments, leaving owners of those properties at risk of a closure by the coffee king.

Buyers completing a 1031 exchange make up a large percentage of the NNN market. In addition to limiting their management responsibilities, the investor’s motivation is to complete the 1031 exchange to avoid paying taxes on sale. In many cases, entering into a 1031 from a multifamily property into a NNN can result in higher cash flow than paying taxes on a sale and reinvesting the proceeds.

A significant determinant of value for NNN properties is the financial strength of a tenant guaranteeing the lease. The stronger the tenan’ts credit, the less likely there will be a default on the lease. This makes stronger credit tenants much more desirable, especially for risk averse investors. Below are the main tenant credit types and their descriptions.

Unrated

Unrated tenants are tenants without a credit rating by a national agency. Many multiunit restaurant franchisees are not large enough to have a credit rating but often have attractive financial statements. When purchasing an NNN property with an unrated tenant, it is ideal to review the tenants financial statements with an accountant or financial advisor to obtain an assessment of the tenan’ts credit worthiness.

Where are the best NNN leased property’s located and does it need to be close to where you live?

If you own a commercial property that is management intensive and requires frequent site visits such as an apartment building or neighborhood strip center, it is much less important for single credit NNN properties. This is because the credit tenant is typically responsible for most, if not all of the operating costs for the property, and they don’t need you if there is a roof leak or plumbing problem. They are responsible for these issues.

Most of our clients prefer to purchase their single tenant properties in high growth, low tax states which exhibit both job and population growth in a business-friendly state. Some of the most popular properties are in Texas, Tennessee, North Carolina and Florida.