When making NNN lease investments, just like in other real estate factions, investors should perform in-depth due diligence for the triple net lease assets. In other words, potential investors should inspect all aspects that underline owning an NNN-leased property to ensure the property is exactly as advertised before putting your money in it.
In this article, we will disclose the top due diligence considerations for your NNN lease investments.
Due Diligence Considerations for NNN Lease Investments
Although there is always more due diligence an investor can do to ensure their future investment is as it should be, here are some of the most important areas to consider when making NNN lease investments.
Tenant Compatibility
Renting a property to an unfit tenant can lead to many problems, and it’s a scenario no one wants on their hands. Luckily, there are ways to ensure the tenant checks all the boxes when it comes to NNN lease investments.
One of the simplest ways to inspect the quality of the prospective tenant is to use the credit appraisal of the business in question. However, nothing is set in stone when it comes to checking the quality of the tenant because even the most successful and lucrative company history can’t guarantee future success. Yet, the credit rank of a prospective tenant can provide much-needed insight into the financial habits of the business.
Institutions that perform credit checks on companies are essentially credit rating companies like Standard & Poor’s, Moody’s, and Fitch, and according to the findings, a company might be rated “BBB,” or “investment-grade,” and “AAA,” signifying the highest tier of credit quality.
Unit-Level Economics
When it comes to NNN assets, the second-most important due diligence consideration is performing an analysis on the unit-level economics, meaning comparing the NNN lease investments in question to other similar businesses, especially those in the surrounding areas.
Depending on the tenant, the unit-level economics can shift focus; for instance, if we’re talking about a fast-food chain, the analytics would concentrate on the sales of food, past revenues, and overall profits.
Major real-estate investment agencies are keen on acquiring NNN assets with short-term contracts, like 5-year leases, because they feel that if the tenant is successful in their business, they are more likely to extend the contract when the lease terminates.
Underwriting the Lease
Underwriting the lease is the most important part of the NNN due diligence review. This is because underwriting includes rent, rent increases, renewal options, sales reporting, options to terminate, co-tenancy clauses, ROFR, and much more!
At the core of a NNN arrangement, are the agreements and commitment from your tenant to not only pay their rent for the duration of the lease term, but also to pay for repairs, real estate taxes, and most other expenses for the property. The underwriting of the lease will lay all of this out accurately for both parties.
Underwriting the Real Estate
Another important area to underwrite is the value of the underlying real estate in case the tenant leaves and the property needs to be redeveloped. Potential vacancy is always an underlying risk factor in any NNN arrangement, making it integral to the due diligence process.
Factors to consider when reviewing the value of the real estate are the overall market stability and growth, development in the surrounding area, traffic counts, and, of course, location, location, location!
Other Due Diligence Considerations for NNN Lease Investments
Besides performing a credit check on the tenant and inspecting the unit-level economics, there are a few other due diligence considerations to keep in mind, like:
- The type of rent and the pace of increase during the contracted period;
- The strength of the demographics in the area;
- The necessary property improvements;
- The property’s condition, the structure’s age, and when it was last upgraded.
With all of these due diligence aspects in mind, you can be confident you’ve taken precautionary measures before putting your money on the table.
Is Due Diligence Really Needed for NNN Lease Investments?
Of course. You need to make sure you’ve made the right choice when it comes to your financial future.
Even though due diligence could be never-ending, thanks to Brisky Net Lease, you’ll understand the most important aspects in no time. Whether you’re looking to make an NNN lease investment or an off-market investment, we offer the best NNN services for you.
Get in touch with our team and schedule an appointment today.