Why NNN???
A TRIPLE–NET LEASE (NNN) (NET, NET, NET) is a lease that requires the tenant to pay for property taxes, insurance and maintenance in addition to the rent. Also referred to as “Net Net Net Lease”.
A TRUE, NNN lease is by far the most secure for an Investor. It should provide that all expenses associated with the property are passed through to the tenants in the form of Common Area Maintenance (CAM) fees or special assessments due at the time they are paid by the owner such as taxes and insurance. This provides protection for the owner that hedges against loss for any unexpected repairs (roof damage, structural damage, etc.). It also should cover increases in taxes, insurance as well.
There are many different interpretations of NNN by Brokers across the country as well as within the same city. The Investor needs to make certain that the lease is in fact a TRUE NNN lease. A lease that provides that the owner is responsible for maintenance of the roof, structure and/or the parking lot is not a true NNN lease. It means that the owner must come “out of pocket” to cover repairs to these items. Many brokers provide for a “reserve” to be set aside by the owner to cover these expenses. The “reserves” come out of the rental income to the owner.
A better term for this most desirable type of lease is an “Absolute” or “Bond Type” lease. These are known to provide that ALL expenses, regardless of their nature, are the responsibility of the tenant during the term of the lease and any extensions. These are virtually the lowest form of risk to the investor.
Any lease is only as good as the strength of the tenant signing it. The stronger the tenant, the lower the risk and the lower the Capitalization Rate (CAP RATE). A National Tenant with a high (A+-) rating by Standard and Poors or equivalent is going to bring the lower CAP RATE. The chance of loss of rental income is practically diminished due to the strength of the tenants ability to pay the rent, even if they should justify moving out of the premises. The other side of the scale is the risky tenant who could easily move, file bankruptcy or just go out of business. The CAP RATE on this property is going to be much higher giving the unsophisticated Investor a false sense of a GOOD deal. The “good deal” goes away when all or part of the property becomes vacant for whatever and it takes months or even years to re-lease the property. When this happens all of the “good deal” cash flow goes down the drain.
Be sure to read my comments on Why Restaurants? These are one of the BEST investments available with the right tenants on the lease.
Contact Information
Larry Dwyer
Orange Investment Group
Formerly
Universal Realty, Inc
Hit your BACK button to return to the previous page.
The Companies shown herein are only examples of Tenants in the buildings we sell.
The Registered Trademarks/Logos are the property of their respective Companies.