Commercial property with NNN lease

28 Replies

I am newbie to commercial real estate and study this recently. I plan to purchase out of state commercial property with NNN lease. Per my understanding, for NNN lease, it is leasee's responsibility to handle all maintenance cost and pay insurance and property tax. So from landlord point of view, I should be hassle free ideally and net rent should be my net income.

Anyone has out of state commercial property experience with NNN lease here? Is that easy to handle for the out of state investor who could not visit property easily?

Also since landlord has no maintenance responsibility for the property, do I still need management company to manage the property?

How can I guarantee the leasee will pay the property tax and buy the property insurance for the property? Will I get tax payment receipt and detail insurance policy copy which I can make sure they have the correct policy and enough coverage?

Thanks a lot for any suggestion and advise.

@Bo Wang NNN means that the tenant is responsible for their proportional share of common area taxes, insurance, utilities and repairs.

In addition, the tenant should also be responsible for taxes, insurance, repairs and maintenance on their on unit. 

You will most likely want a management company to take care of common area maintenance (CAM) like parking lot maintenance, snow plowing and landscaping, which as mentioned above, you will bill to tenants in proportion to the square footage that they occupy.

Get a copy of the leases. Many NNN leases require landlord to pay the expenses and tenants will pay a pro-rata share each month. Landlords can also be responsible for snow removal, upkeep, landscaping with tenants reimbursing expenses. I like paying the property taxes and insurance myself for all of my properties.

@Bo Wang I think the missing piece here is that this is a single tenant building. Is that correct? If so, no common area, thus no CAM. And if this is in fact the case, yes it is common for the tenant to be responsible for all aspects of the maintenance of the property in an absolute net lease, or NNN lease. However, it's not the rule, so I would read the lease carefully to see what it actually stipulates about the landlord's obligations and the tenant's obligations. For example, some leases still make the landlord responsible for capex items like the roof, foundation, exterior walls, structural, etc., and it really depends on how that lease was negotiated and what was agreed to by the parties.

Thanks @Charlie MacPherson, @Ash Patel, @Eduardo Zepeda for all the suggestion, that does help a lot.

For maintenance, to make sure the tenant maintain the property properly, is that possible I have inspector inspect the property regularly (such as yearly), if there are deferred maintenance, can I request the tenant to fix it? Does this the normal case?

Also, I do see some NNN lease property vacant during the lease, if they are corporate guaranteed, the company will still continue pay the rent until lease end, but how to handle these vacant property during this period before the lease end? Does the landlord has the power to re-rent to other tenant?

Thanks again.

You as a newbie will not get corporate guaranteed leases. You will get d-f rated tenants. Have you ever heard of O and NNN? O and NNN get Walgreens type tenants. You will get Granny and Pappys flower shop types as tenants.

Make sure the building you buy can be used in various ways.

Originally posted by @Bo Wang :

Thanks @Charlie MacPherson, @Ash Patel, @Eduardo Zepeda for all the suggestion, that does help a lot.

For maintenance, to make sure the tenant maintain the property properly, is that possible I have inspector inspect the property regularly (such as yearly), if there are deferred maintenance, can I request the tenant to fix it? Does this the normal case?

Also, I do see some NNN lease property vacant during the lease, if they are corporate guaranteed, the company will still continue pay the rent until lease end, but how to handle these vacant property during this period before the lease end? Does the landlord has the power to re-rent to other tenant?

Thanks again.

Typically the space could be subleased if the corporate guaranteed tenant vacated. This item would be covered in the lease. I am a supporter of single tenant net leased investments and have worked on brokerage teams specializing in NNN properties. If you find a product type, tenant, and market that you like, the opportunities for NNN lease investing are endless. Good luck!

Hi Bo,

Without talking to you on the phone about your specific situation it is hard to give specific info.

Single tenant properties you generally have 

NNN - Absolute triple net and you do nothing.

NN - Depending what is written into the lease you might be responsible for roof, structure, parking lot, utility lines,etc. 

Ground lease - You do not own the building just the land and tenant pays ground rent. Typically if the tenant does not renew the option period you get the building for free that was constructed on the land. 

( You also have zero cash flow, and leasehold type deals but those are more rare).

Multi tenant retail buildings are a different animal.

Different buildings in various states are trading at various cap rates currently. The price range you are buying in determines what is possible or not.

I look over 500 to 1,000 retail properties a week for clients all across the country. I have lots of California clients. It also matters if you are trying to do a 1031 exchange or not as certain timelines have to be met.

Hope it helps.

Does a newbie have a snowballs chance in HELL of getting an AA AAA tenant with corporate guarantees? that offer great reurns.

The truth please. My NNN stock holdings depend on your answers......lol.

Originally posted by @Jody Newman :

You as a newbie will not get corporate guaranteed leases. You will get d-f rated tenants. Have you ever heard of O and NNN? O and NNN get Walgreens type tenants. You will get Granny and Pappys flower shop types as tenants.

Make sure the building you buy can be used in various ways.

I talked to several commercial loan lender/broker already, none of them mention that I will not qualify the corporate guaranteed NNN lease. They mainly care about how much down pay I can put down, and the credit score, etc. They give me a price range for me to consider for the property price range as well. I do mention that I am only interested in the big corporate guaranteed lease, they have no issue with that. Hope they are clear with my request, but I will be surprised if corporate guaranteed lease has such limitation for the investor. I still have a lot of to learn and thanks for your suggestion.

Originally posted by @Ed LeGrand :
Originally posted by @Bo Wang:

Thanks @Charlie MacPherson, @Ash Patel, @Eduardo Zepeda for all the suggestion, that does help a lot.

For maintenance, to make sure the tenant maintain the property properly, is that possible I have inspector inspect the property regularly (such as yearly), if there are deferred maintenance, can I request the tenant to fix it? Does this the normal case?

Also, I do see some NNN lease property vacant during the lease, if they are corporate guaranteed, the company will still continue pay the rent until lease end, but how to handle these vacant property during this period before the lease end? Does the landlord has the power to re-rent to other tenant?

Thanks again.

Typically the space could be subleased if the corporate guaranteed tenant vacated. This item would be covered in the lease. I am a supporter of single tenant net leased investments and have worked on brokerage teams specializing in NNN properties. If you find a product type, tenant, and market that you like, the opportunities for NNN lease investing are endless. Good luck!

 @Ed LeGrand, currently I do only focus on the single tenant lease as well, but still evaluate which property type should I focus on, such as drug store, franchise store, restaurant, etc. Still a lot of to learn and long way to go before I pull the trigger. :)

Originally posted by @Joel Owens :

Hi Bo,

Without talking to you on the phone about your specific situation it is hard to give specific info.

Single tenant properties you generally have 

NNN - Absolute triple net and you do nothing.

NN - Depending what is written into the lease you might be responsible for roof, structure, parking lot, utility lines,etc. 

Ground lease - You do not own the building just the land and tenant pays ground rent. Typically if the tenant does not renew the option period you get the building for free that was constructed on the land. 

( You also have zero cash flow, and leasehold type deals but those are more rare).

Multi tenant retail buildings are a different animal.

Different buildings in various states are trading at various cap rates currently. The price range you are buying in determines what is possible or not.

I look over 500 to 1,000 retail properties a week for clients all across the country. I have lots of California clients. It also matters if you are trying to do a 1031 exchange or not as certain timelines have to be met.

Hope it helps.

 @Joel Owens, thanks for detail explanation. Yes, I do see cap rate change a lot for different area. In CA, could not find high cap rate, but I do see good cap rate for out of state opportunity. 

Originally posted by @Bo Wang :
Originally posted by @Ed LeGrand:
Originally posted by @Bo Wang:

Thanks @Charlie MacPherson, @Ash Patel, @Eduardo Zepeda for all the suggestion, that does help a lot.

For maintenance, to make sure the tenant maintain the property properly, is that possible I have inspector inspect the property regularly (such as yearly), if there are deferred maintenance, can I request the tenant to fix it? Does this the normal case?

Also, I do see some NNN lease property vacant during the lease, if they are corporate guaranteed, the company will still continue pay the rent until lease end, but how to handle these vacant property during this period before the lease end? Does the landlord has the power to re-rent to other tenant?

Thanks again.

Typically the space could be subleased if the corporate guaranteed tenant vacated. This item would be covered in the lease. I am a supporter of single tenant net leased investments and have worked on brokerage teams specializing in NNN properties. If you find a product type, tenant, and market that you like, the opportunities for NNN lease investing are endless. Good luck!

 @Ed LeGrand, currently I do only focus on the single tenant lease as well, but still evaluate which property type should I focus on, such as drug store, franchise store, restaurant, etc. Still a lot of to learn and long way to go before I pull the trigger. :)

Updated about 1 year ago

Double post from mobile.

Originally posted by @Ed LeGrand:
Originally posted by @Bo Wang:
Originally posted by @Ed LeGrand:
Originally posted by @Bo Wang:

Thanks @Charlie MacPherson, @Ash Patel, @Eduardo Zepeda for all the suggestion, that does help a lot.

For maintenance, to make sure the tenant maintain the property properly, is that possible I have inspector inspect the property regularly (such as yearly), if there are deferred maintenance, can I request the tenant to fix it? Does this the normal case?

Also, I do see some NNN lease property vacant during the lease, if they are corporate guaranteed, the company will still continue pay the rent until lease end, but how to handle these vacant property during this period before the lease end? Does the landlord has the power to re-rent to other tenant?

Thanks again.

Typically the space could be subleased if the corporate guaranteed tenant vacated. This item would be covered in the lease. I am a supporter of single tenant net leased investments and have worked on brokerage teams specializing in NNN properties. If you find a product type, tenant, and market that you like, the opportunities for NNN lease investing are endless. Good luck!

 @Ed LeGrand, currently I do only focus on the single tenant lease as well, but still evaluate which property type should I focus on, such as drug store, franchise store, restaurant, etc. Still a lot of to learn and long way to go before I pull the trigger. :)

Updated about 1 year ago

Double post from mobile.

this may come across as standard protocol but make sure you verify that taxes and insurance are paid and documented. Had to make a loan last year for landlord that had a triple net never received communication that taxes were maintained and received a letter from the state that is property was to be sold at a tax sale.

What dollar value properties you dealing in $5,000,000 plus. I just dont see how a small fry can make it in NNN sphere with tenants of dubious quality.

Wouldnt we all love to be the lanlord to McDs and Walgreens.

That is great Bo. Another tip when searching for corporate guaranteed "high" cap rates in CA, is to take a look at B and C markets throughout the state. 

For example, a new construction STNL Starbucks in an area like Chico could trade at a higher cap rate than in Thousand Oaks. And, the caramel macchiatos are still the same price.

Originally posted by @Ed LeGrand :

That is great Bo. Another tip when searching for corporate guaranteed "high" cap rates in CA, is to take a look at B and C markets throughout the state. 

For example, a new construction STNL Starbucks in an area like Chico could trade at a higher cap rate than in Thousand Oaks. And, the caramel macchiatos are still the same price.

 Enlighten us.   Can you give numbers on what a starbucks pays in rent on a nnn lease.

Originally posted by @Jody Newman:

What dollar value properties you dealing in $5,000,000 plus. I just dont see how a small fry can make it in NNN sphere with tenants of dubious quality.

Wouldnt we all love to be the lanlord to McDs and Walgreens.

I'm curious what @Joel Owens has to say, but I can't see why a "newbie" can't do this.  Now, "newbie" and "small fry" are two different things, in my mind.   To buy a $5 million property, you need a serious down payment and the ability to qualify for that loan.  I think that means something north of $1.25 million down and $5 million net worth.  But if you can swing that, I think its entirely possible to buy a Walgreens or McDonalds.  If you don't have two nickels to rub together, you're not going to play in that space.  I also don't think this is a space for no money down deals.

There are brokers that deal in these properties.  I used to get e-mails from one until I unsubscribed.  I don't recall any Micky D's but there were several WalGreens and similar properties.  My concern with these (besides the size of the deals) is what happens if the tenant declare bankruptcy.  Many of these building are pretty dedicated to their specific client and you could be left with nothing but a chunk of land.

Originally posted by @Jon Holdman :

Originally posted by @Jody Newman:

What dollar value properties you dealing in $5,000,000 plus. I just dont see how a small fry can make it in NNN sphere with tenants of dubious quality.

Wouldnt we all love to be the lanlord to McDs and Walgreens.

I'm curious what @Joel Owens has to say, but I can't see why a "newbie" can't do this.  Now, "newbie" and "small fry" are two different things, in my mind.   To buy a $5 million property, you need a serious down payment and the ability to qualify for that loan.  I think that means something north of $1.25 million down and $5 million net worth.  But if you can swing that, I think its entirely possible to buy a Walgreens or McDonalds.  If you don't have two nickels to rub together, you're not going to play in that space.  I also don't think this is a space for no money down deals.

There are brokers that deal in these properties.  I used to get e-mails from one until I unsubscribed.  I don't recall any Micky D's but there were several WalGreens and similar properties.  My concern with these (besides the size of the deals) is what happens if the tenant declare bankruptcy.  Many of these building are pretty dedicated to their specific client and you could be left with nothing but a chunk of land

 I take OP as a small fry getting big league advice..     Do i need to go back to skool and work on my reeding comprhension.........lol.       Nothing in OPs post indicates he has money burning a hole in his trousers.

Originally posted by @Jon Holdman :

Originally posted by @Jody Newman:

What dollar value properties you dealing in $5,000,000 plus. I just dont see how a small fry can make it in NNN sphere with tenants of dubious quality.

Wouldnt we all love to be the lanlord to McDs and Walgreens.

I'm curious what @Joel Owens has to say, but I can't see why a "newbie" can't do this.  Now, "newbie" and "small fry" are two different things, in my mind.   To buy a $5 million property, you need a serious down payment and the ability to qualify for that loan.  I think that means something north of $1.25 million down and $5 million net worth.  But if you can swing that, I think its entirely possible to buy a Walgreens or McDonalds.  If you don't have two nickels to rub together, you're not going to play in that space.  I also don't think this is a space for no money down deals.

There are brokers that deal in these properties.  I used to get e-mails from one until I unsubscribed.  I don't recall any Micky D's but there were several WalGreens and similar properties.  My concern with these (besides the size of the deals) is what happens if the tenant declare bankruptcy.  Many of these building are pretty dedicated to their specific client and you could be left with nothing but a chunk of land.

@Jon Holdman, thanks for pointing out bankruptcy risk, looks pick industry is even more important than the location. If the tenant directly got bought by another company (not go through bankruptcy),  I assume the new company will guarantee the original lease?  If the tenant fill bankruptcy (chapter 11 case?) but also got bought by a new company, what will be this case here? Does the original lease still guaranteed by the new owner? Thanks again.

@Bo Wang I have no idea how these leases work. I've only looked at these enough to know they're out of my league at the moment. Maybe someday. Or, more likely, as part of a syndication. I have an investment in a mini-storage and the syndicator of that deal has discussed a NNN deal. The mini-storage is for sale and the guy is looking for a 1031 possibility, so who knows how that might pan out. You don't have to think very hard to identify major bankruptcies - Home Base, Circuit City, Borders, Radio Shack to name a few. Retail is a tough business these days, and I don't see it getting better.

This thread is going all over the place.

Mortgage brokers will spend many hours with buyer. Commercial NNN brokers will not. Time is money.

You have not said Bo what price range you are buying in. For instance sub 1.5 million price mainly looking at Dollar stores at 6.25. to 7.0 cap rates with no rental increases in primary lease period.

2 million and up you get into more tenant types. I am not worried about specific tenant use Mcdonald's and Walgreens is a simple box that can easily be re-tenanted as location is generally great.  When you buy you figure out what second generation tenant would pay for the space if it ever went dark.

Mcdonald's and Chic-fil-a you are talking 4 to 5 caps with long term leases in place. Walgreens, CVS 5 to 6 plus cap rates with newer leases. Values are tied cap rate wise to length of primary term left with guarantee. You have to look at blended cap rate over time as the primary lease term winds down. Disclosure of sales in the lease is a plus as you can monitor trends over time and likelihood to renew the options and plan accordingly.

There are some value plays with a Walgreens where 5 years left on primary term for say a 7 to 8 cap. The investor is rolling the dice that they will renew the option and with rent increase have a high cap rate. 15 to 20 year leases it's 5 to 6 caps all day long. The 5 years is generally an all cash play or half down at least. Lender wants to know when option comes up and tenant does not renew that land and building dark value is not lower than remaining loan balance. This way if owner cannot renew then lender can foreclose and be close to made whole on the loan.

Dollar stores and Pharmacy are generally flat rent in primary lease term with no increases. Restaurants, Auto stores, banks, medical office,etc. generally have rental increases.

Buyers have to get real about returns.

General cap rate to cost for a developer is 9 to 9.5 cap rate so they ARE NOT,ARE NOT selling a newly minted lease for a 7 to 8 cap folks. If that is what you are looking or thinking quit now and go back to residential investing. I know because besides a commercial broker I am also a retail developer. The developer with a long term lease will just convert construction to permanent debt fixed for 10 years and wait until a better time in the cycle to sell or refi. They are not developing a property for 100 basis point spread on resale and handing you all the equity. It doesn't work that way. 

Now when you get into retail centers etc.  you can get into 7 plus cap rates in certain deal sizes. Sometimes even 8 caps. These are not 1 or 2 million dollar properties but 7,10,12 million dollar centers etc.

I look at thousands of properties a month every month nationally. Theory is great but real world  makes the difference. 

Sometimes a developer WILL want to redeploy capital to build more projects. In certain cases instead of 6.25 cap they might g 6.75 for a quick sale. They are NOT usually dealing with individual buyers. They are dealing with REIT's and funds that can close for the right deal in all cash within 30 days and then place debt on it after words.

The scope of an individual buyers expectations or circumstances cannot be fully covered on a forum. That is why people call me and talk on the phone because every investor just like taxes is different. I give them the realities of the market on a national scale and then they decide if NNN whether single or multi tenant is right for them.

I just think it is a wasted exercise to go into tons of what if's when someone does not have the deep level experience of the reality in the sector.

Hope it helps.       

@Joel Owens, thanks for detail analysis, I just saw your email and replied there, any further help will be really appreciate.

Updated about 1 year ago

@Jo-Ann Lapin, @Ed LeGrand, @Jon Holdman, thanks for the tip and sharing, really appreciate that.

@Bo Wang keep educating yourself and know the difference between net lease, triple net, and double net lease structures. Remember, the lease is the contract so all maintenance, CAM charges, go dark clauses, ability to sublet, etc must be explicitly stated in the lease to know 100% who is responsible for what. Also, I prefer to pay for taxes and insurance myself and bill back to the tenant for reimbursement as that guarantees it is paid and is really the only way to know it was paid on time. 

Also, know your tenant! You may have a franchisee of a national fast food chain, but he only has one locations so his corporate guarantee isn't worth too much, right? Compare that to a regional company with 50+ locations then decide which you think is riskier/what cap rate you want. 

Regarding property management, if the building is new and the tenant is solid then you will not have to worry much with a property management company. Especially if you have an absolute net lease. Make sure the HVAC maintenance in the lease requires the tenant to provide 3rd party maintenance reports to you upon request. Also, make sure the lease says it must have monthly or quarterly maintenance. Ensure you get the roof warranty transferred over and it doesn't become void for any reason.

Feel free to reach out to me if I can help in any way.

Good luck!

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