As investors look to compare the various investment opportunities that can be found on sites such as Loopnet, they should be aware that oftentimes, these offerings are not entirely forthright in terms of the statement about investor obligations pursuant to the offered lease.. Some brokers opine that a lease is NET to the landlord without emphasizing that the term Net can be NNN, NN or N.
NNN suggests “pure net” leases that place the burden for any sort of problem onto the tenant while NN, also sometimes referred to as “double-net,” leaves the burden of some site and structural responsibilities upon the investor. A savvy investor not only fully understands the limitations of each offering shares property investment advisor Brian Fielding, but factors in the cost to have those landlord obligations addressed by professionals at the tenant location, which often is not at all proximate to the investor’s home/office.
The greatest problem with N and NN leases is that it is often difficult to project operating costs for a great number of different tenant operations. Not only does the nature of the tenant business create varying demands of the site, but an investor who does not work or live near to the property will have to retain persons to provide the oversight that insures that assets are not being wasted through abuse.
There are a variety of so called net leases: double-net or triple-net being the most common offerings made to non-operating investors. The double-net lease suggests that the tenant is responsible for paying all of the utilities, taxes, insurance, and maintenance costs associated with the property, but the owner assumes responsibility for any and all expenses that have to do with structural elements of the land and building shares property investment advisor Brian Fielding. The much preferred triple-net lease generally ascribes full responsibility for all elements onto the Tenant. It is for that reason that most NNN tenant offerings tend to be long term leases [often 15 years or longer] to regionally and nationally recognized tenants who have the wherewithal to handle a broad spectrum of issues that arise in the ownership and management of commercial properties.
Brokers advise that there are certain investors who are seeking the equivalent of a creditworthy bond. Those parties are often coming out of a previous investment through IRS 1031 tax deferment and tend to care less about long term revenue growth. Best known among those offerings are Walgreen’s and CVS who have excellent credit but often do not have any escalation clauses in their lease and provide for unilateral options to renew at the discretion of the Tenant. Other, sometimes less creditworthy tenants offer more traditional lease forms where there are escalation provisions within the term and on all renewal options.
Most serious investors in commercial real estate consider the Net Present Value of the stream of income they will receive, ascribe a risk factor to the creditworthiness of the Tenant and then “guestimate” the likely value of the property and building at the end of the lease term. It is the investor who contemplates the numerous factors involved more carefully that tends to be most successful in his reaching his return on investment goals.
“If the Investor is willing to consider anything short of a NNN lease, he should be very careful to properly estimate all costs he is likely to incur dealing with those items not fully covered by the lease, and then re-compute the real cap rate he is likely to enjoy,” shares Brian Fielding. “Underestimating the challenges and costs to find a reliable and knowledgeable person to address some of the complex and costly issues involved in handling structural, roof and site issues can be devastating.”
For more information about the benefits of net leases and hot-topics of discussion in the commercial real estate industry, visit http://brianfielding.com.