Why Triple Net (NNN) Properties?
Triple Net Lease Properties (NNN) are a great way to fund your kid’s education and feel secure each night about your real estate investment.
Triple Net Lease Properties (NNN) are appealing to those individuals, or their trusts, who wish to have their investment sheltered by depreciation, partake in capital gains advantages and have little to no management responsibility. The investor’s exit strategy is that they can sell-out, often with a profit, or can simply hold onto the property, allowing it to further appreciate in market value, and then re-lease it again at a higher rate either to the original tenant or to a new tenant when the lease term expires.
The Benefits of Owning Triple Net Lease Properties NNN Property
- Excellent security from both the credit tenant and the prime real estate.
- Acquisition of a NNN property is a relatively simple transaction with minimal costs.
- A favorable cash return on a passive investment.
- Property depreciation shelters a portion of the annual cash return from income taxes.
- The value of the majority of NNN Properties appreciates during the term of the lease.
- Minimal risk with investment grade tenants associated with Triple Net Lease Properties. Guaranteed monthly income.
- Opportunities for higher returns based on regional and national tenants.
- Investor owns property with little to no on-site management responsibilities because of the structure of Triple Net Lease Properties.
- Pride of ownership.
- The tenant pays property insurance, maintenance, improvements, and taxes on the majority of Triple Net Leased Properties. See the various types of NNN leases below.
The Three Types of Net Leases (NNN)
- Absolute Triple Net (NNN) – The Ideal option: The tenant pays all operating expenses, including maintenance, repairs, taxes and replacement for the entire property, without limitation.
- Triple Net Lease (NNN): Similar to absolute Triple Net Leases, this lease may have additional owner responsibilities. The owner is generally liable for the structural components of the building such as the roof, foundation, and load-bearing walls. NNN lease properties will vary from transaction to transaction, so the actual lease on a property must be carefully read, as part of the investment due diligence, by a professional real estate attorney as well as the purchaser.
- Other Net Leases (NNN): These are leases which provide that the tenant pays one, or two, of the net lease components such as (Taxes, Insurance, and Maintenance). So, for example, a double net lease might be one in which the tenant pays for taxes and insurance but not maintenance. It is necessary to review the actual language of the specific lease to determine who pays what.
At TripleNet Investors, we understand the differences in the family of Triple Net Lease Properties and our attorneys are extremely proficient, experienced and competent in this particular real estate sector.
How Triple Net Lease Properties Are Valued
Triple Net Lease Properties typically are valued using their Capitalization Rate. Commonly referred to as Cap Rates they are a simple way to compare the value of a stream of economic benefits in a given property. This is computed as a pretax cap rate using the Triple Net Lease Properties Net Operating Income (NOI).
A property’s NOI is the property’s gross income less all expenses (except debt service). In absolute NNN properties, one of the premier examples of the Triple Net Lease Properties family, the annual rent is the same as the NOI. The Cap Rate is simply the NOI divided by the purchase price.
For example: if the purchase price is $2,000,000, and the NOI is $200,000 per year, then the cap rate is $200,000 divided by $2,000,000 = 10% Cap Rate.
Which Considerations TripleNet Investors Employs when Determining what the Cap Rate Should be on a Particular Triple Net Leased Property:
- The credit worthiness of the tenant is critical.
- The length of the lease of one of the Triple Net Lease Properties in question.
- Type and frequency of increases in rent.
- Strength of the demographics of each location.
- Improvements built on the grounds of the NNN property: are they specifically single-use improvements or are they representative of a generic tenant with little specialization? Generic improvements may not require a large capital expenditure for future re-tenanting, however for a special purpose / single-use modified property, this may require a large capital expense and time, to convert the property, before re-tenanting.
- Condition and the age of the improvements with NNN investment properties.
- Location, Location, Location of the Triple Net Lease Properties.
The more positive the above factors are, the lower the Cap Rate, and the higher the value of the NNN leased properties. But if the above factors are weak, the Cap Rate will be higher, and the resulting value will be lower for that specific NNN Property.
Markets are not always what they seem to be and low cap rate NNN properties are not necessary a lower risk investment – they could simply be a bad investment that is overpriced. TripleNet Investors, on behalf of their investors seek only those Triple Net Lease Properties that are priced in our favor, with a higher cap rate for a property that has low risk factors. Part of TripleNet Investors’s philosophy is to understand and evaluate the idiosyncrasies of NNN properties and then to act and acquire appropriate NNN properties.