Commercial NNN Properties - What to consider?

Question

Hello

For investing in a commercial property with a triple net lease (NNN), what factors do you consider for determining if it is a good investment?  Do you look at cash flow in the same manner that you do with residential?  Or, are you more focused on long-term appreciation?

Thank you

Greg Scott · Answer

Most NNN properties are commercial which means their valuation is based on the income approach.  As a result, both appreciation and cash flow will depend on your ability to increase NOI over time.  Risk vs reward will depend on the length of the lease, the tenant quality, and your ability to fill vacancies.

Ronald Rohde · Answer

The most important question is, what is market rent for the property? Is the current tenant paying above or below?

Carlos Ptriawan · Answer

it's much more complicated than that. You need to also check the credibility of the renter because your business depends on them as well. Take a look if your NNN is Walgreens, when Walgreens had substantial layoff and store closing, you would close business too.

Or if your building can be used by..... lets say Jiffy Lube Oil Changes, and they're bankrupt, who wants to lease your space ? I guess in NNN you need a pro in all aspect possible. This is certainly not my domain and not the risk type I'm comfortable with.

Michael K Gallagher · Answer

@Ross Hayes I mostly work in the retail space, and work on the tenant rep side of the commercial transaction.  there are a ton of factors as many here have eluded to that make a NNN deal a good or bad deal, but as most have mentioned the valuation is based on the incomes of the property, so the real value in a property is the tenant and/or the lease that is in place.

Questions to ask to help determine if its a good deal or not in my mind include:

- Is it a multi or single tenant building

- Is it easily converted to a different use?  In other words is it a bank building and only banks or similar retail uses would use the building? is the ground the building sits on at a prime hard corner that can always be scraped and redeveloped for anew use?

-  What are the local market dynamics for the current use of the building?  do these same dynamics and populations lend themselves to other uses?

- how much time is left on the current lease you are inheriting, are they options involved?

all these and more go into if the deal is a good deal, a risky deal etc.

Joel Owens · Answer

Hi Ross,

I have been in NNN about 20 years now as a principal commercial broker, investor, syndicator, etc.

I stay mainly on the buyer broker side working with clients nationally. I am not pitching myself but mentioning this because very few high level commercial brokers work the buyer side. Instead they focus on the listing side for volume. Their splits are so bad making maybe 10k or 20k out of 100k payout that they run hard on the hamster wheel and are not wealthy. The senior director have the VP's and newer agents do more of the grunt work while they land more portfolio's to sell.

So because most live by the deal they sell whatever is available to them from their sellers. That could be bad, mediocre, or a good property. Most of the time the good stuff sells pre-market and then the scraps are sold off to uneducated buyers to the space. The listing brokers do a solid for the seller dumping the dog properties at a premium and the seller rewards those listing brokerages with more business.

Owning single tenant NNN is easy the HARD part is the process reviewing lots of properties to find the gems to buy. It's just like any other asset class lots of junk out there. I do not post on here as often anymore just because I am so busy with clients and my own investments these days. So make sure whoever you work with they know what they are doing and they do not need the money to live. Often those types can tell you what they really think about a property.

On my website and on Amazon I think is a free book on NNN I wrote that goes in depth. Hope it helps.

Evan Polaski · Answer

@Ross Hayes, this is a bit contingent on the NNN property you are looking at.  Typically when people mention investing in NNN, they are talking single tenant NNN, however many retail, office and industrial tenants are NNN, even if in a multi-tenant property.

So going back to single tenant NNN properties, I would say most investors are in the cash flow game.  When looking at retail NNN, many of these properties are fairly specialty use, like Carlos noted, so if you have a tenant that does not renew, you have a property that could be near worthless.  And in the case of a Jiffy Lube, you may have major environmental issues to deal with after they leave.  This is one reason you often see restaurant spaces trading at lower cap rates than say, Walgreens, since the marketability of the property is slightly better.  (assuming strong concept, corporate lease, long term left, etc)

Office and industrial tend to be a little more marketable upon tenant departure.

To echo Brock: you want to see tenant quality, sales (if retail), competition set, path of growth, term of lease, options, rent bumps defined, confirm true NNNs without limits (i.e. I have seen Dollar General leases where they have a cap on RTU costs or Kroger within a larger center, not paying their full prorata share for various items like roof replacement, or parking lot resealing).  The tenant may have caps on Insurance and/or tax increases, etc.

Brock Mogensen · Answer

Length of lease, quality of tenant, where is their rent in comparison to market, does the market have a need for that type of space, how is the roof and parking lot (?)Most importantly do your DD on the lease and terms contained in there.

Not sure if you're talking about retail, industrial, or office here. But different things to look at for each one.

Commercial NNN Properties - What to consider?

Most Popular Reply