During the market crisis of 2008, industry experts noticed something very strange. Triple Net investment properties all remained relatively unaffected by the surrounding economic change. It doesn’t take an economic masters to realize just how they have been ingrained into the foundation of our market place [although it doesn’t hurt]. So when it was actually tested, and subsequently proven, that triple net property could not be beaten, CRELender decided… why not join them?
Most likely during an average week, you walk into several NNN properties. This is because Triple Net is the form of lease used most frequently for commercial freestanding buildings. Sometimes referred to as a net-net-net-lease, this structuring is very popular with small business owners. Generally it is easier to secure financing to lease a property rather than purchase out right, and if the business’s operating requirements are expected to change significantly over the next several years it should definitely be considered. The sellers of triple-net-leased properties can be grouped into three categories: investor/owners; owner/users; and build-to-suit developers.
Owner/users find NNN beneficial in the way of leasebacks, offering them an ability to divert a large portion of their capital to other business needs. Investors can then use the saved overhead when answering leasehold improvements to satisfy an old anchor tenant, or long term prospect. This can also bridge the lease transition between existing and planned developments. Building features will be new, up-to-date and most likely capable of adjustment to tenant need. It’s a low management intensity investment with a potential for property appreciation, in addition to annuity payments, and it can be a hedge against inflation. Also, you can gain conductibility of cost recovery for tax purposes, and possibly interest, if debt financing is utilized.
Many real estate investors think nothing could be simpler than an investment in a triple-net-leased. Some often liken it to buying a bond. Triple Net is most often sought out for relief from management obligations, assured income, pride of ownership, and preservation of capital. For these specific reason, Triple net properties make excellent armchair Investments .Many even take pride in having a well-known and respected company as a tenant. Unique in that they are long-term leases, many small businesses operate in leased facilities for their entire existence. From an investor’s perspective, they have appeal because they generate returns in two ways: through price appreciation and through income. The Leasee covering any tax increase and costs associated with maintenance and/or repairs of the building, the parking lot, and other areas used. The property owner enjoys tax benefits as well, such as depreciation and investment tax credits that are not open to tenants. Many investors are seeking a suitable replacement property in order to complete a tax-deferred exchange are often over-joyed to discover the world of the Triple Net property.
Straightforward to own and operate, and seemingly perfect for the investor, triple-net-leased properties can be the most challenging type of real estate investment for advisers to structure or, if a lease already exists, to understand. There are of course other elements of a lease agreement that can weigh heavily on a contracts overall acceptability. The opportunity may be there, but it can be tough to close on a triple net deal. Banks are coming back with stricter underwriting, especially when pertaining to retail. In the past, net lease buyers would commit to deals based largely on the credit quality of the tenant. That is not the case anymore. More and more banks are beginning to over scrutinizing the real estate fundamentals, property and market conditions and neighboring vacancies. Even A-credit, big name retailers are not of any additional assurance when securing financial backing in the new market. It would seem that, for the time, most banks have suspended their reason-ability when considering Triple Net financing in today’s environment.