ABC’s of NNN leased property investing - by Gullo

Today, one of the most popular types of real estate investments is known as a triple net, NNN leased property investment or a NNN deal, all being one in the same. These are typically free-standing buildings that are occupied by single tenants with high credit ratings on a net, net, net basis (hence the NNN acronym), meaning the tenant is responsible for the real estate taxes, insurance and all maintenance. These arm-chair investments are the perfect investment vehicle for those passive investors that are looking to be management-free. They typically are quality long-term leases ranging from 10 to 20 years plus option renewals. They can provide stable cash flow that normally is distributed on a monthly basis, attractive financing for acquisition of this form of a real estate investment is available, and the unique tax benefits that only real estate provides. The advantages of this form of a real estate investment have fueled a tremendous growth in demand from investors on every level. They appeal to part-time investors looking for guaranteed income with no day-to-day management responsibility. They can provide an attractive exit strategy for those who own active investments like multifamily investment properties who are tired of management and who would like to take advantage of the best kept secret in real estate known as a 1031 Exchange. Exchangors can use a NNN leased property as a replacement property to complete their 1031 Exchange. Why doesn’t the tenant own it’s own real estate? Often times national tenants will elect to conserve their capital and instead of purchasing their own properties they will execute long term triple-net leases. This allows them to free up their capital and grow their business into more location quicker by not owning the real estate. There are tax advantages as well for them not owning the real estate such as the lease payment is 100% deductible and by not having a mortgage (liability) on their balance sheet they are financially stronger from a net worth point of view. As with any investments, there are many factors to consider in valuing and structuring the deal. For the convenience of no management, and stable long-term guaranteed income, you can expect a lower return than what you would receive on a more hands-on high maintenance property like a multifamily investment. Prices can range from $1 million to $12 million, as well as cap-rates ranging from 5% for the highest rated tenants to 8% for lesser credit quality or those with shorter lease terms. Keep in mind a cap-rate is the percentage of return on the investment as if it were bought with all cash. The lower the cap-rate, the higher the price.  With the use of leverage (mortgages)  and today’s low interest rates it is very possible to get a higher return  rather then paying all cash what we call positive leverage. Like with any investment, there is always risk. When evaluating any NNN deal, be aware that all credits are not equal. A company’s credit rating is determined by one of three ratings firms (Standard and Poor’s, Moody’s and Fitch) and those with a rating of BBB- and higher (S&P scale) are considered investment grade. Examples of the top-tier tenants include Walgreens, CVS, Walmart, Home Depot and Dollar General to name a few. These are also the same properties with the highest valuations (the lower cap-rates) and they also set the highest standard for valuation. Generally, as the tenant’s credit rating declines, so does the price of the property and a higher cap-rate is used. So, if you are looking for a replacement property to complete a 1031 Exchange or you are a private investor just looking for a management-free real estate investment, with a long term lease and stable cash flow, a NNN leased investment property can be what the doctor ordered. Today you can own one of these assets with as little as $350,000 as your down payment requirement or you can own a portion of one with as little as $100,000 down. Russell Gullo, CCIM, CEA, is a certified exchange advisor, president of R. J. Gullo & Co., Inc., West Seneca, N.Y.