If you’re new to the industry, net lease investments can seem overwhelming. At Calkain, our goal is to help our clients understand what they’re getting into and how to make profitable business decisions. Net lease investments can be beneficial for all parties involved but it’s important to know what each party’s responsibilities are before entering into a net lease arrangement. If you’d like to know more about these innovative investments, don’t hesitate to contact us online or by phone. In the meantime, here’s a quick look at what net lease investing is all about:
Net leases are agreements between landlords and tenants and they are most common in the commercial real estate industry (as opposed to the residential real estate industry). In addition to paying regular rent payments, the tenant agrees to cover additional costs associated with the property. There are three main types of net lease investments, each with varying types of costs:
- Single Net Leases: These net lease agreements are fairly rare. In addition to paying rent, the tenant agrees to pay for property taxes; the landlord is responsible for all other costs.
- Double Net Leases: In a double net lease, the tenant is responsible for covering property taxes and building insurance in addition to rent.
- Triple Net Leases: These are often referred to as “NNN Net Leases.” Triple net leases are some of the most common net lease investments. In addition to paying rent, the tenant agrees to pay for taxes, building insurance, and maintenance fees associated with the property. This type of net lease is very common in commercial real estate agreements and it is sometimes also used in the residential real estate industry for single family units. Talk to us if you think a triple net lease investment might be for you.
Net lease investing tends to be very beneficial for landlords, and especially for those who manage several properties.
- Landlords have a steady source of income. Fluctuations in the economy are to be expected, and any seasoned investor will know that income can vary depending on market strength. However, these investments tend to provide steady streams of income regardless of these fluctuations.
- Landlords don’t have to worry about paying taxes or covering maintenance costs. Shifting these responsibilities onto the tenant can be very beneficial for a landlord. If a tenant doesn’t respect the property or care for it properly, the landlord won’t be stuck paying for high insurance or maintenance bills.
- Net leases allow for long-term leases, but can be customized to fit the needs of the landlord and tenant. Some net lease agreements, such as single net leases, tend to involve long-term leases. These leases could last 10, 15, or even 25 years. Successful long-term lease agreements with trustworthy tenants can be very beneficial for investors who are trying to lower their risk assessment profiles.
Tenants who agree to net leases may find that these agreements are beneficial for them as well. For one reason, landlords may be more willing to offer lower rent payments to compensate for the additional costs. Another benefit is that a tenant who cares for the property and keeps it well-maintained may find that their additional costs — such as insurance payments and maintenance fees — are very low.
An absolute net lease does not necessarily cover all of the expenses that are related to a property. Some net lease investments opportunities are better than others. A strong tenant can cover most of the expenses associated with that investment. Legal costs and accounting costs for the landlord’s certified public accountant (CPA) may not be included in the purchase price of the property. Thankfully, these costs are generally incidental. Before signing on the dotted line, make sure you are clear on what all of the related costs will be and that they are manageable.
Though triple net lease investments are popular for several good reasons, like any investment, they can carry some risk. Their predictable revenue stream and minimum management requirements are strong upsides. However, triple net lease investments do carry some risk and it’s important to be aware of what they are and how to mitigate those risks:
- Tenant credit risk can be an issue when it is not a publicly traded and/or financially sound commercial entity.
- If the tenant falls on hard times, they may have difficulty meeting their financial obligations. If they enter into bankruptcy proceedings, net lease investments that are a good choice initially may decline into a less than favorable investment.
- It is common to sell NNN lease investments at the end of a long lease because the new tenant may be a credit risk. Tenant rollover can present risk if the investor is not savvy in choosing ideal tenants who are not likely to default on their financial obligations.
Before making the plunge into triple net lease investments, it’s important to understand the credit risk of any potential tenant. Here are some tips on how to minimize your risk and help safeguard your long term investment:
- Require the submission of the prospective tenant’s financial statements. Analyze them carefully. If this is not a familiar process for you, hire a CPA to do this on your behalf. Their hourly fee will likely be an excellent investment as part of your due diligence.
- Examine the credit ratings of the prospective tenant if they are a publicly traded company.
- Check to see if the prospective tenant has any bond issues, if applicable.
- Read stock analyst reports of the prospective tenant, if available.
- Private companies should be willing to submit financial statements to you in lieu of publicly released documentation associated with public companies.
If you’re interested in knowing more about nnn lease investments or other types of investment opportunities, a trained Calkain representative can help you. Triple net lease investments may be a good choice for your portfolio, but one of our staff specialists can help you understand the net risks and advantages.
Do you have questions? Learn more with Investing in Net Lease Properties FAQNet Lease Investments