Revealing the Mystery Behind Net Lease Commercial Real Estate Investing
As I talk to potential investors about the possibilities of investing in commercial real estate, one of the biggest misunderstandings is net leasing. Net leases are commercial real estate investments in which the tenant bears more responsibility for the building, while the owner has fewer management responsibilities. In this article, we’ll cover the three main types of net lease properties: Modified Net, Triple Net (NNN), and Double Net (NN), and how each can be beneficial to different types of investors and their investment criteria.
modified network
In a standard modified net lease, the tenant pays for all utilities, building maintenance, repairs, and insurance. However, the landlord is still responsible for property taxes and everything else.
The benefit of this type of lease is that the tenant has a vested interest in the property and is more likely to take care of it. With the tenant paying their own maintenance, repairs, and insurance, they are sure to take care of the property for future use. Unlike a property without a modified net lease, the tenant may only be responsible for liability insurance and utilities. Therefore, a modified lease gives the landlord a tenant who cares more about the building and less administrative responsibilities.
The downside to this type of lease is that there are still administrative responsibilities associated with this lease structure. For example, the landlord still has to make sure property taxes are paid and is generally responsible for the roof and structure. So if there’s a leak in the roof, guess who the tenant calls?
The modified lease is better than a traditional commercial lease, but is on the lower end of the spectrum when it comes to net leases. Investors who may be interested in this type of lease are not as concerned with management responsibilities as they are with the idea of having a tenant pay for maintenance, repairs and insurance.
Triple Net (NNN)
Triple net lease or NNN lease tends to be the industry norm and the most sought after. In a standard triple net lease, there are generally limitations on capital expenditures. However, the tenant is responsible for property expenses which include property taxes, property insurance, and maintenance.
The benefit of this type of lease is that the owner has virtually no responsibility when it comes to the management and care of the property. Many times, NNN or triple-net rental properties are guaranteed by corporate credit tenants such as Walgreen, CVS, Burger King, McDonalds, Borders Bookstore, etc., who guarantee the rent, including taxes, maintenance, and insurance, for the entire term. rental period.
The disadvantage of this type of lease is minimal, but it can have a large impact on the purchase price of the asset (property) in question. Essentially, if the tenant securing the lease is not a credit tenant, then it has a higher risk of breach of the lease. A credit tenant is typically a public or private entity that has a strong credit rating from S&P. In situations where there is no credit tenant, it is prudent for the investor to purchase the property with a higher capitalization rate, based on market standards at the time. This offsets the risk associated with purchasing an NNN property secured by a tenant with no credit. For example, if a franchisee is leasing the property, the corporation generally does not guarantee the lease. If that franchisee has financial problems and must close, the probability that the investor will be able to obtain the rents owed for the rest of the lease decreases drastically.
The NNN Lease Investment or Triple Net Lease is ideal for an out-of-state investor, or an investor who doesn’t want the hassle of property management. In addition to paying debt service, the investor can expect to receive a fixed rent check each month according to the lease that was signed.
Net Net or Double Net (NN)
Another net lease is the Net Net or Double Net (NN) lease. These leases are very similar to NNN leases; however, the landlord is generally responsible for structural damage, such as the roof and/or load-bearing walls.
The benefit of this type of lease is the same as that of an NNN lease. Again, management duties are drastically reduced in this type of leasing situation.
Except for roof problems and structural damage, this type of lease shares the same disadvantage as the NNN lease. Additionally, many double net leases are actually completed by major brand franchisees who can pay much of what an NNN tenant pays, however, does not want the liability for roof and structural damage.
A double net lease is also an ideal investment for an out-of-state investor or an investor who doesn’t want the hassle of property management. The investor will receive a fixed rent check each month in accordance with the lease that was signed and will pay all debt service associated with the lease.
Not all NNN leases are created equal
I must mention that investors should be fully aware of the type of investment they are considering. For example, many commercial brokers will market a property as a triple net or NNN lease property; however, the property may actually be a double net lease or NN. Be sure to read the fine print on the lease and have your attorney review it.
Finally, net lease investments are the safest and most risk-averse commercial real estate investments in the market, due to their fixed rents, tenant liability and, for the most part, corporate guarantees. However, be sure to contact a professional commercial real estate investment advisor who can guide you through the entire process of acquiring and financing your net lease investment. Also, remember that business brokers are professional sellers; Therefore, prospective net lease investors would be wise to retain the services of a professional commercial real estate investment advisor to work on their behalf. There is generally no cost to the buyer to retain the services of a commercial real estate investment advisor who can act on their behalf with a fiduciary responsibility to their client, much like an attorney would represent them in court. . This ensures that the investor gets the best possible deal utilizing the investment advisors’ strong negotiating skills and lessens the hassles associated with purchasing net lease commercial investment properties.
