How to Analyze a NNN Real Estate Deal

While this article is more a matter of personal opinion than anything else, I thought it would be helpful for my readers.

First of all, let’s clear up some confusion. The three N’s in NNN stand for “triple-net” or “triple-net-lease” and refer to a lease structure in which the owner of the asset has no landlord responsibilities (it essentially means that the rent payments the tenant makes are NET of all other obligations tied to the property.) Single tenant NNN real estate deals are the least management intensive property type possible. These deals typically come with long lease terms, and a tenant who is responsible for everything, from real estate taxes, to maintenance of the physical structure etc.

Because the tenants on these deals typically have lease terms that are between 10-20 years long, many buyers think that they are very low risk opportunities. Guaranteed money! or a “safe bet…” but that is not exactly true. As with everything, there’s risk, and an uneducated buyer who is simply wooed by a nice sales package can easily land in an opportunity that can become a significant headache down the line.

Below are the major sensitivities that I personally keep an eye out for when looking at a NNN opportunity.

  • Location – this is probably the most important element of any real estate deal, ever. But it is especially important with single tenant NNN opportunities, because there’s only one tenant. Having only one tenant means that if you lose that tenant, you have nothing. And if you are carrying a mortgage, you could go from cash-flow positive to negative overnight. Therefore, it is of utmost importance that you pick your location wisely. Tenants in great locations have less of a chance of wanting to leave, and if they do leave, being able to find a new tenant is significantly easier.
  • Lease term – the term of the lease is the next thing to look out for. Good tenants will honor their lease even when they are not performing. But they will definitely not renew an expiring lease if their sales are not up to par. Having a longer lease term offers more assurance to the landlord that the revenue stream will be more reliable. (It’s important to note that on the flip side, operators looking for a value-add opportunity will often hunt deals in which the tenant is nearing the end of their term. More on that in another article.)
  • Basis – your basis represents the total cost of taking ownership in the property. It is important to look at how much you are paying per foot at the asset. If your price per foot is sky high, it may be impossible to re-lease vacant space at an acceptable lease rate in the event of a vacancy.
  • Rent Rate – your rent rate is equally important. If your tenant is paying you $100 per foot (per year) in rent, and every other tenant in the market is paying $50 per foot (per year), you will likely have to take a significant haircut on your rents if the tenant ever decided to leave.
  • Credit – many of the tenants in the single tenant NNN space are large corporations with good credit. Such corporations can be relied upon to honor their lease. A shoddy franchisee tenant with no capacity to guaranty a lease is a significant liability, and should not be overlooked.
  • Sales – it is often (but not always) possible to determine the sales of a given tenant at a location. It is important to speak to experts about how much revenue the tenant should have to be considered healthy. It would be wise to stay away from tenants who are struggling and do not earn enough to cover their rent comfortably.

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