NNN Properties & Triple Net Leases
If you’re an investor and you’re seeking your next opportunity to get behind a successful real estate project – especially if it’s a commercial property that’s available to lease – it is vital to gain as much knowledge as possible regarding financing a triple net lease property, otherwise known as NNN financing.
How to Obtain Loans for Commercial Properties, AKA “Triple Net Leases”
NNN properties are leased to an individual tenant who, in turn, incurs the normal rent and utility payments, in addition to further expenses and responsibilities that would normally be expected of the property owner – that would normally be beyond the scope of an average renter – such as building insurance, repairs and maintenance, and real estate taxes, among other associated fees.
In contrast, a tenant with a single net lease would only be expected to pay for property taxes, whereas a double net lease would necessitate the lessee to cover property taxes and insurance; however, a triple net lease would see the tenant take on most – if not all – of the financial responsibilities associated with the property in question, along with normal rent payments as well.
In this sense, a triple net lease can constitute a very favorable financial situation for the owner of the property, as their tenant is handling the main expenses that the owner would ordinarily be required to cover. But a triple net lease is not a one-sided agreement, as the lessee pays on average a lower amount of rent than a normal tenant would be responsible for; for all intents and purposes, the property owner is providing a discount to the tenant on rent in exchange for incurring various other expenses on their behalf.
Triple net leases are actually favored by many business owners for a variety of reasons. First of all, the length of the lease tends to be longer than average – typically between 10 and 15 years – and rent increases are controlled and lesser than usual, which can be advantageous to companies that wish to operate in a specific location for long periods of time.
In addition, the tenant has near-full control over their facilities and the autonomy to conduct whatever repairs and maintenance they see fit without needing to consult with the property owner or a property management company.
As for those looking to invest in a triple net property, there are also a slew of benefits as well, such as a long-term, stable source of income; the assumed appreciation in value of the property in question, without minimal – or no – cost to the owner; no concerns over management or vacancy issues; no out-of-pocket maintenance or repair costs; and the ability to save money via a tax deferment upon the eventual sale of the property by rolling capital into a 1031 exchange.
In addition, the deal between lessee and lessor in a triple net lease is normally governed by a single set of agreements, which means there are no rent negotiations or surprise maintenance costs, resulting in a steady, stable stream of income that normally occurs without any headaches. This results in the investor essentially taking on the role of a completely hands-off landlord; the only time the investor would have to become directly involved in the situation is of the tenant somehow failed to live up to their end of the agreement, such as missing rent payments or damaging the property without repairing it.
Ultimately, the goal for such an undertaking is for the rent that you receive from your tenant to cover the fees you have incurred related to the mortgage and financing of the property. To this end, it is advised that you seek out a triple net advisor with a good reputation that can guide you through this process, ensuring that you will not only find the correct financing options for your situation, but the proper lease agreement with your eventual tenant that will cover your monthly costs as well.
Acquiring a loan to invest in a triple net commercial real estate property has a number of specific financial requirements for the borrower; among them is the investor possessing a minimum accredited net worth of $1 million, excluding up to $200,000 in income – or $300,000 if the purchasers are joint filing – or excluding the filer’s primary home value.
These hefty requirements can make it difficult for investors with less net worth to acquire loans for triple net lease properties, but there are ways for these parties to get around these issues. One such as is via real estate investment trusts, which are specifically geared toward NNN properties.
Sometimes, when an investor purchases a triple net commercial real estate property, a tenant is already in-place with an existing agreement with the previous owner; it is vital for you as the new owner to completely understand all aspects of the current agreement that you will be taking over, including the terms and any renewal options.
In the case that a triple net commercial real estate property is already occupied by a tenant, the lender will offer financing terms based on the number of years remaining in the existing agreement that you will be assuming; for example, you will likely receive a 10-year loan if there are 10 years remaining on the lease agreement with the tenant. On average, however, lenders will offer loans for triple net properties for terms of 5, 7 or 10 years.
Financing NNN properties for sale normally comes from a federally insured bank – which typically offers the best loan options, with more competitive rates and favorable terms – or a credit union. Private lenders are also a possibility if time is a factor, but also are normally the most expensive option.
And finally, it’s very important to properly vet your prospective tenant before coming to any lease agreement with a triple net commercial property; the most important factor is establishing that they have a good credit rating, as you will be relying on their ability to pay rent and fees in order to satisfy your own financial obligations to your lender.
For investors, triple net properties represent a low risk, high reward opportunity that’s difficult to beat.