A Triple Net (NNN) Lease is popular with investors because it is structured as a turnkey investment. In a Triple Net Lease, the tenant is responsible for paying the three major categories of expenses associated with commercial real estate ownership which are: property taxes, insurance and maintenance.
Triple-net properties are often leased to a single tenant and to large companies. Many of these companies have “Investment Grade” ratings. Common tenants include Walgreens, CVS Pharmacy, Starbucks, Dollar General, Verizon Wireless, Chase Bank and Wendy’s.
Benefits Of Investment-Grade, Long-Term Net-Leases
Some of the benefits offered with investment grade, long-term net-leases are:
Simplicity: Triple-net and Double-net leases offer investors the ability to enjoy the benefits of real estate ownership without many of the management headaches associated with income properties. Long-term net-leases are generally simple to manage because most of the property expenses are paid by the tenant. If the property is damaged, the tenant is responsible for repairing the property at their own expense.
Income Stability: Investment-grade, long-term net-leases can provide stability of income for investors. Because lease terms are often long and payments typically backed by national companies with strong balance sheets, they likely offer greater protection during tough economic times then smaller companies who may struggle to make lease payments.
Attractive Financing: Long-term leases backed by investment grade tenants may help investors obtain better financing terms from lenders. This can save the investor a lot of money over the life of the loan.
Drawbacks of Investment-Grade, Long-Term Net Leases
Single-Tenant Dependence: The largest drawback to investment-grade, long-term triple net leased real estate is that if your major tenant defaults on their lease, it can be difficult to find another tenant. If there is debt on the property, it can be stressful to make expense payments yourself while searching for another tenant.
Tenant Improvements: Another risk of leasing to a national credit tenant is the likely cost of having to make improvements or modifications to the property to accommodate the tenant.
Upside Limitations: While long-term leases to investment grade tenants may offer downside protection, especially during tough economic times, they may limit your upside growth potential. Unlike commercial properties that have shorter-term leases, such as multi-family properties that can be increased during a growing market, long-term net-leases are fixed for many years and do not allow this flexibility. Therefore, it is less likely that a long-term net-leased property will experience large upside appreciation when you go to sell the property. Though there are often increases built in to the lease agreement, these rent increases are typically limited to one to two percent per year.
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