What do I need to know before diving into NNN lease investing

Question

Coming from owning only multifamily properties, what do I need to know or where can I find info on what goes into owning/operating a building with NNN leases?

I am looking for multi-tenant commercial retail/shopping center with NNN leases. Are offering memorandums usually reliable? In multifamily they can be highly inaccurate but I don't see where they can be wrong in commercial with NNN leases, other than vacancy.

I know going through the existing leases, inspecting deferred maintenance, terms of what the landlord is responsible for, and underwriting the existing tenant's business' ability to repay are all important.

Are there any hidden expenses that can play into owning NNN leases? For instance, in multifamily repair expenses and vacancy/turnover can come up easily and will kill cash flow.  These are some things that came up for me and made me want to jump ship to NNN leases.

What are some situations where NNN investors can get caught up and lose cash flow, such as deferred maintenance. I know an unforeseen vacancy can be a huge issue.

Or am I overthinking this and is it truly hands off, I can count on the rent each month as long as its occupied, and tenants are responsible for CAM and repairs.

Do I just need to manage the property management CAM, accounting for the income and NNN reconciliation at the end of the year?

Sorry if this is unclear, it just seems like theres a lack of information out there on commercial. If anyone could point me in the right direction I would really appreciate it.

Neil Cronkrite · Answer

When I think of NNN, I like to think of LLL: location, lease, loan. Location refers to the macro area (population growth, job growth, vehicles per day, entry and exit points, signage, etc). As folks above point out, it also refers to the lease itself. What are the expenses that the lease won't cover? How strong is the tenant? What is the rent amount and how much time on the lease is left? Any pre-arranged options? And finally, the loan. NNN valuation is tightly correlated to the cost of debt. Be sure to work with debt brokers who can advise you appropriately on how banks will view the strength of the lease in how they price and appraise the property.

Zach Alms · Answer

Alex,

1. OMs are not to be relied on, you'll want to do your own DD and confirm it is accurate.

2. Hidden expenses you should look out for are roof, parking lot/sidewalk and possibly HVAC units. Sometimes these items are covered in a NNN lease but normally full replacement is not covered.

3. Just because it is NNN doesn't mean it will be completely hands off, unless you are hiring a property management company. You'll still need to set up and pay all vendor and service contractors, common area utilities, take calls or emails from tenants on any maintenance issues.. it's definitely a lot less work than being a hands on apartment owner/manager but I just don't want you to think that NNN is completely hands off.

John McKee · Answer

The leases are the key to dive into because they can all be different!  Just make sure there is enough of a CAM budget to cover all common area expenses.  Make sure you drill the existing owner on warranties on the roof, insurance costs, and the age and status of all common are expenses.  You can generally self manage these if it's small enough in size.  You can PM me if you want a full analysis on your project.  Welcome to the NNN lifestyle!

Joel Owens · Answer

Alex people that move from multifamily into multi-tenant are primed to be ripped off by a seller or listing brokerage. They will try to pass stuff onto you that they would not stand a chance selling to someone like me or my clients.

With a retail center there are literally hundreds of items to watch out for or more in a deal. It's way more complex than a single tenant deal with lots of variables. Often people get sucked in looking at a high cap rate compared to what multifamily is going for. The lower credit to no credit the tenant is the more you have to vet them with underwriting as a non-pay, slow pay, or going dark risk.

Ronald Rohde · Answer

nah, always room for someone to interpret or find exceptions to AI!

Mark H. Porter · Answer

Dig in deeply on the CAM reimbursement conditions.  Big national or regional players know their impact as an anchor and will have limits on how much property taxes (they immediately go up as you laids more that the seller), hvac R&M, parking lot care, roof, etc…

Immanuel Sibero · Answer

I learned a lot from YouTube, I'm going to miss it when AI and ChatGPT take over...

Cheers... Immanuel

Paul De Luca · Answer

Depends on the specific lease language. If the lease language says it's the landlord's responsibility, usually something like a roof replacement, then the landlord must pay.

Ronald Rohde · Answer

You can find multi tenant industrial.

Ronald Rohde · Answer

How much free time are you going to dedicate to management? Multi tenant stuff is a lot more work, you have shared common areas and plenty of parking or other tenant disputes to babysit. I think everything has been touched on, but check YouTube, there are a lot of resources to learn more.

Whats your price point? LTV?

What do I need to know before diving into NNN lease investing

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