A triple net lease, also known as an NNN lease, has become a preferred investment option in the past few years, mainly because it favors the investor in many different ways. It’s a stable and long-term investment, which is why it’s so popular in recent years – but how does NNN financing work?
For anyone looking to invest in an NNN lease, we’ve comprised a helpful guide on everything you need to know about what it means to make an NNN lease investment and how NNN financing works.
First – What Are Types of Net Leases?
There are different types of net leases: A single net lease requires the tenant to pay only the property taxes in addition to rent. However, with a double net lease, the tenant pays rent plus the property taxes and insurance premiums. The best net lease for landlords is the triple net lease, also known as a net-net-net lease or an NNN lease, in which the tenant pays rent plus all three additional expenses.
Triple Net Financing
When investing in an NNN asset, the buyer is obligated to fulfill several requirements, like having an accredited net worth of $1 million. This excludes the option of up to $200,000 in income, or $300,000 if it’s a joint venture and the value of the initial home of the filer.
Considering that, it might feel risky for a smaller investor to use the advantages of an NNN lease. However, there are ways for small investors to make a move by reaching out to REITs (real estate investment trusts), which are fully functional cash pools for acquiring NNN lease properties.
Here are a few of the triple net financing options for small and mid investors:
- REITs – A real estate investment trust (REIT) is a company that owns and finances income-producing real estate. REITs often own different types of commercial real estate and are able to offer financing for many real estate investment options, including triple net financing.
- 1031 Exchange – A 1031 exchange is a real estate investing tool that allows investors to swap out an investment property for another and defer capital gains/losses or capital gains tax that you otherwise would have to pay at the time of sale.
- Lender Financing – Lender financing simply means an individual, group (public or private), or financial institution funds your real estate investment with the expectation that their loan will be repaid with interest or fees.
When Financing NNN Assets, Here’s What to Look Out For:
The Quality of the Tenant
This refers to the credit ratings of the tenant, usually rated by some of the biggest credit rating agencies like Moody, Fitch, or Standard & Poor. The bigger the company, sometimes you’ll see better credit ratings, which can mean financial stability. However, not all large tenants have a great credit rating.
There are several factors to consider, including years in business, debt obligations, and more. Creditworthiness can be a difficult factor to quantify, which is why working with a professional is often the best route to ensure success.
If the tenant is small, like a family-owned business, for example, their credit rating might not be as high, but they may still be a good fit for the location.
Inspect the Current Lease Agreement
The lease structure should include terms, rent increases, options to extend or terminate, obligations of both the tenant and landlord, and more. Often, when you buy an NNN property, it will already be occupied by a tenant, so paying close attention to the contract details is paramount.
Closely inspect the remaining lease terms and the lease-renewal options the tenant might have since your loan will depend on those terms of the lease. For instance, if the tenant is left with five more years until the lease expires, your loan term will also be five years; if there are ten more years to go, that’s how long your loan will be in effect.
Property & Market Conditions
There are many factors to look at pertaining specifically to the property, such as age and condition of the property, environmental factors, location, traffic counts, and surrounding developments.
In addition, local and current market factors like Covid-19, the retail climate, interest rates, consumer confidence, economic climate, and more are all additional considerations to be fully acquainted with.
Is NNN Financing for You?
Most likely – yes! From tax exemptions to collecting a steady, passive income, investing in an NNN property is definitely worth it. The bigger the buyer’s net worth, the better the chances of a smooth acquisition.
From leasing an NNN property to acquiring one, Brisky Net Lease offers several services according to your criteria. Additionally, you’ll get exclusive insight into the vast gallery of NNN assets for sale.
If you’ve been exploring options to invest in an NNN property but don’t know how to go about it, contact us to schedule an appointment and go through all the details surrounding NNN leases.