In today’s uncertain economic times, traditional investments provide neither the stability or meaningful returns that investors seek. Perhaps that is why interest in net-leased, single-tenant real estate is skyrocketing. But for the casual investor, these properties – commonly called NNN or STNL in the industry – remain somewhat of a mystery.
Defining NNN Properties
Typically, the types of real estate considered triple net lease investments are freestanding buildings that are leased out to national tenants on a long-term basis ranging between 10-25 years. These national tenants are usually well-recognized names like Walgreens, FedEx and McDonald’s.
Why NNN Properties Are Appealing
There are several reasons that seasoned investors gravitate to NNN properties. First and foremost, these investments tend to generate predictable and lower-risk income, solid capital preservation and good tax deferment. Then there are the more intangible benefits like bragging rights that the investor owns a prestigious building that generates consistent and lucrative monthly rent.
How the NNN Lease is Structured
The details of the lease can be complex, but the basics require that the tenant not only pay monthly rent, but also covers the property taxes, insurance and maintenance costs. And, since there is only a single tenant to oversee (and one with a solid reputation), the investor usually has little to no management responsibilities over the real estate. This is especially beneficial for an investor who lives in a different city, state or country.
Types of NNN Properties
For investors considering the move to NNN property investment, there are several different types of real estate that make up the overall pool. The market is segmented into three categories – retail and restaurants, industrial and medical office buildings.
Types of Tenants
Just like the real property is categorized, so are the potential tenants. However, rather than studying the type of tenant, the critique involves the tenant’s credit worthiness. Potential tenants can be either “credit tenants” or “non-credit tenants.”
Credit tenants tend to be national names to whom rating companies like Standard & Poor assign a credit rating. The most desirable tenants are usually those that are rated as institutional-grade investments, like CVS.
Non-credit tenants tend to be local or regional companies that are not rated by the major agencies. Of course, there are also some big national names that are considered non-credit tenants simply because they carry no debt. These unrated tenants should not be written off.
Is NNN right for you?
There are many factors for an investor to consider before jumping in to the world of NNN investments. Things like return on investment, stability, length of the lease, possible rental increases, lease provisions, location, demographics and other factors play an important role in the decision-making process.
While triple net leases can be a solid investment vehicle for wealth building, stable income and flexibility, there are myriad details that accompany these investments. Be sure to engage with a qualified commercial real estate broker with specialized knowledge in these complex transactions to assist you along the way.