Unveiling the Mystery Behind Net Lease Commercial Real Estate Investing

As I speak with potential investors about the possibilities of investing in commercial real estate, one of the biggest misunderstandings is the net lease. Net leases are commercial real estate investments in which the tenant takes more responsibility for the building, while giving Commercial Real Estate Pricing Strategies the landlord less management responsibilities. In this article, we will cover the three main types of net lease properties – modified net, triple net (NNN), and double net (NN) – and how each one can be beneficial to different types of investors and their investment criteria.
Modified Net
In a standard modified net lease, the tenant pays all utilities, maintenance on the building, repairs, and insurance. However, the landlord is still responsible for property taxes and everything else.
The benefit of this type of lease is that the tenant has a vested interest in the property and is more likely to take care of the property. With the tenant paying their own maintenance, repairs, and insurance, they are sure to take care of the property for future usage. In contrast to a property without a modified net lease, the tenant may only be responsible for basic liability insurance and utilities. Therefore, a modified lease gives the landlord a tenant who cares more about the building and less management responsibilities.
The down side of this type of lease is that there is still management responsibilities associated with this lease structure. For example, the landlord still must ensure that property taxes are paid and is generally responsible for the roof and structure. Therefore, if there is a leak in the roof, guess who the tenant is calling?
The modified lease is better than a traditional commercial lease but is on the lower end of the spectrum when it comes to net leases. Investors who may be interested in this type of lease are not as concerned with management responsibilities, but like the idea of having a tenant who pays for maintenance, repairs, and insurance.
Triple Net (NNN)
Triple net lease or NNN lease tends to be the industry norm and most sought out. In a standard triple net lease there are usually limitations on capital expenses. However, the tenant is responsible for property expenses that include property taxes, property insurance, and maintenance.
The benefit to this type of lease is that the landlord has virtually no responsibility as it relates to managing and taking care of the property. Many times, triple net or NNN lease properties are guaranteed Reasons To Buy A House In 2018 by corporate credit tenants such as Walgreen, CVS, Burger King, McDonalds, Borders Bookstore, etc., who guarantee the rent, including taxes, maintenance, and insurance, for the entire period of the lease.
The downside to this type of lease is minimal, but can have a great impact on the purchase price of the asset (property) in question. Essentially, if the tenant that is guaranteeing the lease is not a credit tenant, then they have a higher risk of defaulting on the lease. A credit tenant is usually a public or private entity that has a strong credit rating by the S&P. In situations where there is no credit tenant, it is prudent for the investor to purchase the property with a higher cap rate, based upon market standards at that time. Thereby, offsetting risk associated with buying a NNN property guaranteed by a non-credit tenant. For example, if a franchisee is leasing the property, generally the corporation does not guarantee the lease. If that franchisee has financial problems and must close, the likelihood of the investor being able to obtain the rents that are due for the remainder of the lease, drastically diminish.
The NNN lease or triple net lease investment is ideal for an out of state investor, or investor who does not want the hassles of property management. Other than paying debt service, the investor can look forward to receiving a fixed rent check each month according to the lease that was signed.
Net Net or Double Net (NN)
Another net lease is the Net Net or Double Net lease (NN). These leases are very similar to NNN leases; however, the landlord is generally responsible for structural damage such as the roof and/or bearing walls.
The benefit to this type of lease is the same with a NNN lease. Again, the management duties are drastically diminished in this type of lease situation.
Except for the roof and structural damage issues, this type of lease shares the same downside as the NNN lease. In addition, many double net leases are actually completed by franchisees of major brands that are able to pay for much of what a NNN tenant pays for, however, does not want the liability of roof and structural damage.
A double net lease is also an ideal investment for an out of state investor, or investor who does not want the hassles of property management. The investor will receive a fixed rent check each month according to the lease that was signed and pay all debt service associated with the lease.
Not All NNN Leases Are Created Equal
I must mention that investors need to be fully aware of the type of investment they are looking into. For example, many commercial brokers will market a property as a triple net or NNN lease property; however, the property may actually be a NN or double net lease. Please be sure and read the fine print of the lease and have your attorney look it over.
Finally, net lease investments are the safest and most risk-averse commercial real estate investment in the market place, due to their fixed rents, tenant responsibility, and mostly corporate guarantees. However, be sure you contact a professional commercial real estate investment advisor, who can walk you through the entire process of acquisition and financing of your net lease investment. In addition, remember that commercial brokers are professional sales people; therefore, it would be wise for potential net lease investors to retain the services of a professional commercial real estate investment advisor to work on their behalf. Usually, there is no cost to the buyer to retain the services of a commercial real estate investment advisor who can act on their behalf with a fiduciary responsibility to their client, just like an attorney who would represent them in court. Thereby, ensuring the investor gets the best deal possible utilizing the investment advisors strong negotiating skills, and decreasing the hassles associated with buying net lease commercial investment property.

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