NNN Investments - getting started

Commercial Real Estate Investing
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NNN Investments - getting started

Jordan S.
CA · Member since 2012 · 1 post · 0 votes

I've been a reader for a long time on these boards and after spending a lot of time looking at multi-family properties I've come to the conclusion that it's probably not the right investment for me. I live in California which makes the cash flow on local deals pretty scarce and it doesn't seem like out of town management is the best long term decision. I was introduced to the concept of single-tenant NNN investments a few months ago and the more I learn the more this seems like it may be the right kind of hard-asset passive income for me.

The returns seems good vs the ongoing management effort required so I’m hoping the experts on this board can help me with a few questions and highlight any key risks I could be missing.

1) Learning Resources: Online content and books are far less comprehensive than multi-family investing. Any great sites / resources I should dig into?

2) What are the big risks: I understand the fundamental risk of having one tenant, but looking at a NNN lease what else should I consider? Eg: time left on lease; ability to repurpose building.

3) Capital improvements: When I see a property that ‘underwent extensive renovations’ during what appears to be the middle of the existing lease, who paid for it? Other than during tenant turnover, what other costs can come up during the lease? Is there a risk during the renewal options?

4) Buyer agent: Does location of the agent matter for these kinds of investments? When looking at multi-family properties it was clear local knowledge was critical, but the NNN area seems more national in nature.

Thank you,
Jordan

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Frank Gallinelli
Rental Property Investor · Southport, CT · Member since 2008 · 160 posts · 137 votes
14y

Follow-up to Johnny's comment about the negotiated lump-sum buyout: You can handle this issue up front as part of the lease. If the corporate tenant wants to close that store, you can have a provision that they pay the value of remaining rent stream discounted at the 10-year t-bill rate. This, I believe, is preferable to having the space vacant for a long period of time, even if they are continuing to pay the rent each month. You get a lump sum and you also get the space back to rent to a new tenant.

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  • David Zacharia
    Real Estate Broker · Las Vegas, NV · Member since 2011 · 1 post · 0 votes
    14y

    1. Learning resources: [SOLICITATION REMOVED]

    2. What are the big risks: Risk is reflected in the cap rate or return. The stronger the tenant (many are rated by Standard & Poor’s and their competitors) the lower the cap rate. You must determine your risk tolerance like any investment. REMAINING LEASE TERM: Most of the buyers I represent want a remaining lease term of at least ten years. Many acquire theses assets to keep in the family and pass them down to their children so a longer remaining lease term is desirous. Some buyers want a short term lease because they like the return if the tenant enacts its option but if the tenant decides to vacate a savvy investor knows he can release the property at a higher rent and a higher return. LANDLORD RESPONSIBILITY: do you want any managerial responsibility for the building and parking lot? If not, there are leases with no landlord responsibility but the returns typically are a little lower. If you want some responsibility as landlord like the roof, structure and/or parking lot the returns are higher because you are incurring more expense and spending more time managing your asset. LOCATION: Do you prefer an asset in your home state or one in a different state? Many investors own assets in a different state from where they reside.

    3. Capital improvements: I’ve seen leases where the landlord or tenant agrees to renovate the property after a number of years at the same property. Recently a client purchased a corporate Jack in the Box ($1.8M) in a sale-leaseback with Jack in the Box. Jack in the Box agreed to spend about $300k renovating the property up to its new prototype and they signed a brand new, twenty year lease after operating at the location for about fifteen years. This happens often with Jack in the Box. If you buy a property with no landlord responsibility for building and parking lot, the only costs incurred by you during the lease agreement is accounting. If you buy a Family Dollar ($750k to $1.5M depending on location) where you are responsible for the roof, structure and parking lot, you could incur later in the lease roof repair, parking lot, and structure expense. Many roofs are guaranteed for at least ten years. Of course there is a risk in tenant not renewing its lease but good leases cause tenant to give you plenty of notice if they are not renewing which will allow you to find the next tenant usually prior to lease expiration.

    4. Buyer agent: Location of the agent doesn’t matter as much as other assets such as apartments. I have a buyer who is based in Los Angeles, my company is located in Las Vegas, and he is buying a DaVita in Illinois and a Hardee’s in Alabama. The knowledge that is critical for your buyer broker to have is the types of assets available and the terms sellers are willing to accept. [REMOVED] You need a buyer broker to ensure: 1. You are receiving the best possible terms and asset quality in your acquisition 2.Selling broker’s advertising of the asset concurs with the lease (and often it does not) [REMOVED]

    David Zacharia
    DZ Net Lease Realty

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  • Frank Gallinelli
    Rental Property Investor · Southport, CT · Member since 2008 · 160 posts · 137 votes
    14y

    Jordan -

    NNN property can be a very rewarding investment. Typically, the return is lower than on a property where you must get very actively involved in day-to-day management. -- but, on the other hand, there is also typically less volatility in your income stream because leases tend to be long-term and can be structured to insulate you from most operating expenses. An ideal lease would require the tenant to pay as additional rent the property taxes (or at lease all increases over a base), as well the property insurance.

    An important consideration is the financial strength of the tenant. I would recommend getting a D&B report and trying to learn as much as you can about them and their history.

    Commercial leases, especially for NNN properties, tend to be more complex than those for residential or small commercial and can contain provisions that may seem obscure but that can have critical consequences (for example, a "kick-out" clause that allows a retail tenant to terminate a lease if it fails to meet certain revenue goals). Have your lawyer examine the lease, and if possible ask for an estoppel certificate to confirm that everything is actually at it appears.

    Frank

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  • Johnny P.
    Real Estate Broker · Orlando, FL · Member since 2008 · 181 posts · 66 votes
    14y

    Jordan - Sorry I was too lazy to read the other comments, but here is my input.

    NNN deals -

    Make sure there is atleast 10 yrs on the lease.
    Make sure the company is not struggling

    read the lease and make sure it is actually NNN. Sometimes they will advertise NNN when the landlord actually has a few responsibilities.

    Location is not extremely important, but if the tenant was to go bankrupt, you want to have a good enough location to potentially find a new tenant.

    Make sure the lease is corporate guaranteed. This way they will continue to pay you for the duration of the lease.

    NNN deals are hot right now, if you want to see a quick list of deals in your area let me know and I will email it to you.

    quick story/ funny example - I know an owner of a starbucks that was NNN corporate guarantee. Starbucks closed the location and continuted to pay the rent because of the corporate guarantee. They negotiated with the onwer to pay him a lump sum instead of paying per month for the next X amount of years. The owner then re-leased the building to another tenant and after spending 70k on tenant improvements, he's making almost double what he would have if starbucks would have stayed there!

    He was obviously VERY fortunate

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    14y

    Jordan,

    There are single,double,and triple net leases.The ability to re-purpose the building fast and cheaply is key.

    Certain corporate tenants with the building design if they go out you have massive costs to get it to a rentable state for another tenant type.

    Case in point I know a Sonic building that has sat as a foreclosure for a year.To re-purpose it you would have to take out the drive thru stalls and the building itself is so small you can't do much with it.

    One key area I didn't see touched on is that YES with a TRUE triple net you do not pay for anything.With other single or doubles you might get a little more but pay for expenses so it's almost a wash in the end.

    The lease is guaranteed and you get mailbox money.The down side is these tenants have rents stay the same amount for long periods of time before any increases and when it does increase the rate is marginal.So when inflation kicks in year after year the returns are diminishing.

    If you are trying to protect your money they can be an excellent investment.

    Tell us more about your situation which will help.I like corner locations or right next to the corner as they hold value and are easier to re-purpose and re-rent.

    Even though the rent doesn't increase as much the land should be way more valuable in time unless the area dies off and growth migrates elsewhere.

    You can also assume loans at sometimes 90 ltv putting down just 10%.The reason is lenders see these loans as having little risk and low chance of default.

    I specialize in multi-family and also triple net so contact me with any questions you have.

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
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  • Frank Gallinelli
    Rental Property Investor · Southport, CT · Member since 2008 · 160 posts · 137 votes
    14y

    Follow-up to Johnny's comment about the negotiated lump-sum buyout: You can handle this issue up front as part of the lease. If the corporate tenant wants to close that store, you can have a provision that they pay the value of remaining rent stream discounted at the 10-year t-bill rate. This, I believe, is preferable to having the space vacant for a long period of time, even if they are continuing to pay the rent each month. You get a lump sum and you also get the space back to rent to a new tenant.

    1Reply
  • Johnny P.
    Real Estate Broker · Orlando, FL · Member since 2008 · 181 posts · 66 votes
    14y

    When you buy the asset the lease will already be in place.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    14y

    If as an investor you don't like the lease in place or that it's fixing to come up for renewal you can negotiate that with the tenant prior to buying.

    If you don't get terms acceptable to you the buyer then offer lower to price in the risk or walk away from the deal.

    It is really important to know where the RENT RATE is going to than where it is at today.You don't want them to have an option to renew you want to lock in that security as a buyer unless you want to get rid of them.

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
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  • Will Beaubien
    Incline Village, NV · Member since 2014 · 3 posts · 0 votes
    12y

    I try to keep all Net Leased investment discussions simple. NNN deals are intended to be simple. The risk is simple! What if the tenant leaves? That is really all you need to worry about. The rest of the details are baked into the lease that you read before buying.

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  • Sam Vogel
    Richmond, TX · Member since 2014 · 1 post · 0 votes
    11y
    With respect, I would not downplay the very real risks or intricacies in NNN deals. Other than above mentioned points it is important to understand the bifurcation of valuation. It is possible to have a $3m valuation on a $2m property simply because the higher value is based on PV of cashflow rather than replacement cost. There are many variables (options to renew etc) but generally, As the term diminishes the value skews towards property value again...thus the advice to stick to longer term deals and the reason why savvy investors will sell out of term investments as the 5 year remaining mark is hit. The other issue revolves gearing or debt on the deal. Imagine a "90% loan to value" cited above where you as an investor have only put down 10% equity. What do YOU think happens if you are sitting on a fixed yield instrument and suddenly interest rates increase by 1% or more? Your $3m asset, "backed" by $2m property could suddenly diminish by $500,000 as investors seek higher yields at the same time as your debt payments rise. Imagine this happening in a financial crisis and your tenant defaults? Good old triple whammy. With cap rates this low there is a reason some REITS are exiting this market. Anyone that tells you that NNN is simple or risk-less very likely does not fully appreciate the nuances of this asset class or like any investor who has only seen a bull market, believes the only way is up. Investors are free to get in touch with me with further questions.
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