Who doesn’t like mailbox money? That’s how you hear a lot of folks refer to triple net (NNN) commercial properties.
A triple net lease means the operating expenses, real estate taxes and insurance are passed through to the tenant(s). In the case of single-tenant properties, the tenant is often responsible for everything, including maintenance of the building. The landlord simply collects a check for as long as the lease is in place.
This is very attractive to investors who want minimal management responsibility. Generally, buyers look at the capitalization rate (cap rate), which is the return the annual rent represents on their investment.
Often, the three questions an investor might ask are: What’s my cap rate? What is the tenant’s credit rating? And how much term is left?
Important questions, but remember, you’re really buying two things: the tenant and the real estate.
With that in mind, there are two key questions that tend to remain unasked:
- How good is the real estate?
- Can we replace the current rent if and when the tenant leaves?
A real life example that shows how crucial these questions are is the position that Rite Aid owners may be in right now. While these investments may have previously checked all their boxes (attractive cap rates, tenants with great credit ratings and long-term corporate lease guarantees), oftentimes, the real estate itself was not adequately considered.
The way that wise buyers avoid this scenario is by asking our key questions up front. Knowing what your building will be worth regardless of its tenancy and being confident that you’ll be able to replace or increase the current rent will help to ensure that your investment is protected.
There are some good opportunities in today’s environment, especially for buyers with cash, but before you pull the trigger, ask the right questions. There is more to life than cap rates.
John Wessling Sr., certified commercial investment member and senior vice president and partner at S.L. Nusbaum Realty Co., is a commercial real estate expert who specializes in investment sales, particularly of multifamily properties and multi-tenant retail centers. He specializes in investment analysis, market analysis and site selection and his transaction experience includes brokering multifamily, hotel, retail and office sales.
