Commercial NNN Properties - What to consider?

Question

Hello

For investing in a commercial property with a triple net lease (NNN), what factors do you consider for determining if it is a good investment?  Do you look at cash flow in the same manner that you do with residential?  Or, are you more focused on long-term appreciation?

Thank you

Greg Scott · Answer

Most NNN properties are commercial which means their valuation is based on the income approach.  As a result, both appreciation and cash flow will depend on your ability to increase NOI over time.  Risk vs reward will depend on the length of the lease, the tenant quality, and your ability to fill vacancies.

Brock Mogensen · Answer

Length of lease, quality of tenant, where is their rent in comparison to market, does the market have a need for that type of space, how is the roof and parking lot (?)Most importantly do your DD on the lease and terms contained in there.

Not sure if you're talking about retail, industrial, or office here. But different things to look at for each one.

Joel Owens · Answer

Hi Ross,

I have been in NNN about 20 years now as a principal commercial broker, investor, syndicator, etc.

I stay mainly on the buyer broker side working with clients nationally. I am not pitching myself but mentioning this because very few high level commercial brokers work the buyer side. Instead they focus on the listing side for volume. Their splits are so bad making maybe 10k or 20k out of 100k payout that they run hard on the hamster wheel and are not wealthy. The senior director have the VP's and newer agents do more of the grunt work while they land more portfolio's to sell.

So because most live by the deal they sell whatever is available to them from their sellers. That could be bad, mediocre, or a good property. Most of the time the good stuff sells pre-market and then the scraps are sold off to uneducated buyers to the space. The listing brokers do a solid for the seller dumping the dog properties at a premium and the seller rewards those listing brokerages with more business.

Owning single tenant NNN is easy the HARD part is the process reviewing lots of properties to find the gems to buy. It's just like any other asset class lots of junk out there. I do not post on here as often anymore just because I am so busy with clients and my own investments these days. So make sure whoever you work with they know what they are doing and they do not need the money to live. Often those types can tell you what they really think about a property.

On my website and on Amazon I think is a free book on NNN I wrote that goes in depth. Hope it helps.

Jake Yuskaitis · Answer

thx didn't catch that. popped up on the forums as recently commented on.

Ronald Rohde · Answer

The most important question is, what is market rent for the property? Is the current tenant paying above or below?

Carlos Ptriawan · Answer

it's much more complicated than that. You need to also check the credibility of the renter because your business depends on them as well. Take a look if your NNN is Walgreens, when Walgreens had substantial layoff and store closing, you would close business too.

Or if your building can be used by..... lets say Jiffy Lube Oil Changes, and they're bankrupt, who wants to lease your space ? I guess in NNN you need a pro in all aspect possible. This is certainly not my domain and not the risk type I'm comfortable with.

Jake Yuskaitis · Answer

you can take whole college courses on how to evaluate commercial real estate

Ronald Rohde · Answer

haha no worries!

Ronald Rohde · Answer

true! or you can bump a thread from 2 years ago :)

Ryan Stomel · Answer

Good list to start with. A few things I'd add from managing a NNN retail portfolio for several years:

Tenant financial health, not just the lease credit. A national franchise name on the door doesn't mean the franchisee operating it is financially stable. Always request 3 years of financials from the actual entity signing the lease, not just the parent franchisor. The lease obligation is only as good as the entity that can pay it.

Co-tenancy clauses in multi-tenant properties. If your strip center has an anchor, check whether your inline tenants have co-tenancy provisions tied to it. If the anchor vacates and you don't backfill within a certain period, those tenants can often drop to percentage rent or even terminate. This is a risk that often doesn't show up in the purchase pro forma.

Re-tenanting timeline for purpose-built spaces. A QSR, urgent care, or nail salon space has a narrower tenant pool than generic retail. Underwrite for 12-18 months of vacancy if you ever need to re-tenant, not 3-6. That changes your returns on a bad vacancy scenario significantly.

CAM cap structure and exclusions. Some tenants have caps on how much their CAM share can increase year-over-year (often 3-5% annually), and the caps frequently don't compound the right way. Know what's capped and what's excluded before you buy — capital items like roof and parking lot are sometimes excluded from caps, which means a big repair year can produce a large unbudgeted CAM bill for you if tenants are capped out.

Commercial NNN Properties - What to consider?

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