Triple N Leases Investment

[Christian Orellana]

Hi Everyone,

Thinking of doing a 1031 exchange and getting into a Triple N investment. Does anyone have experience with Triple N leases? Pros and Cons. Anyone have really bad experiences?  Do you recommend it? OR Should I buy 4-5 single family homes instead? Would really like to hear from your experience. 

Thanks in advance.

[Dave Foster]

@Christian Orellana, It's a great transitional strategy that will reduce your work load greatly. As you're managing longer leases and not worrying about toilets and trash. Just an opinion now that cap rates on NNN are still pretty low. And in many cases interest rates if you have to borrow are higher than the cap rate. So finding the right properties can be a challenge. If your sale is something large enough to split then a transitional strategy of buying a modest NNN for cash and then leveraging on a single family home, or a DST to absorb your debt might be just the fit for you.

[John McKee]

You will have to search my threads to get the details of the good, bad, and the ugly.  In general it's a passive way to own real estate as the tenant takes care of the headaches and cost of repairs in most situations.  PM me for advice, but here are some general guidelines that I live by:

By the location, not the tenant

Read the lease!  There is always an expense somewhere

Diversify your holdings.  Single Tenant, multi tenant, condo, flex space.

Ask yourself this question: is this easy to backfill if the tenant goes Dark?

[Brock Mogensen]

I love NNN. But there are some differences you need to be aware of compared to multifamily.

The lease is the most important part. How much term is left, strength of the tenant, rent escalators, rent/sq ft, etc.

You also want to make sure you have a good understanding of the roof, parking lot, and mechanicals because in a traditional NNN lease, the landlord is reponsible for these items..and they can get expensive.

[Evan Polaski]

@Christian Orellana, not as much experience as Dave, but some.

NNN leases: typically, but not always single tenant. Commercial leases, longer term leases, etc. While I agree the location is more important than tenant, don't take this to mean the tenant does not matter. Typically it will be priced into the property. A Walgreens with 25 yrs of lease left and 5x5yr extensions will be "safer" than a stand-alone mom and pop restaurant with a 5 yr lease and no experience in the restaurant business. The longer lease, assuming strong credit tenant, means you will have a secured income for a long time. If the market softens, you have a defined rent, but if it strengthens, you can't increase rents beyond what is defined in the term.

As noted, NNN is a broad classification, so you need to read all leases to understand what is covered and what isn't. Some will cover real estate taxes, up to an annual 3% increase. But if you get a 5% increase assessment, you are on the hook. Some may cover HVAC (often called RTU) in the entirety, and some may cover up to first $5k, but anything over $5k is LL responsibility.

Also, you need to think about the land value at the end of lease.  A vacant walgreens has limited value to any other use, without either a full reconstruction or major renovations.  While a restaurant, say Olive Garden, may be easier to lease to another restaurant.

Compare this to SFRs, it is just different. Anything residential will be much higher touch and involvement on your side. In a growing market, the upside of SFR is that you always have a tenant base available and with 12 month leases you can increase rents more frequently. But, this is also a challenge if your market shifts or we go into a recession. If rents are declining in the area, you will likely have to drop your rents to keep units full.

[Jim Kittridge]

You need representation that has a lot of experience to avoid common issues like early terminations, performance of that location for tenant, etc..

Rule #1 is make sure you are happy with market rents for the building (not what current tenant is paying).

For example you buy a hip drive-thru coffee shop based on them paying $50/ft in rent for 10 years. Coffee Shop LLC #181 goes out of business and the market is $25/ft.

You paid 2x what it's worth and now get the honor of helping pay to upfit the old building for a new tenant.

[John Sayers]

Established brands will generally have the nod over mom/pop as noted. Just don't give them a pass on diligence recon. It's all up to one's risk tolerances.

 The most recent news days ago on Walgreens, for example, now has it looking to close up to 2,150 of its' 8600 stores. The "25%" that are not helping the bottom line. Time will tell how many a "significant portion" is exactly, as they seeks to turn around the struggling business. One can hope they will honor the NNN and not find loopholes as some have done.

Dig into the financials some to see if you can see hints of the pending issues in the filings and reports. Easier said than done of course.

Name brands with solid balance sheets are generally a better bet, still one can't forget the big fall too, so diligence is just as key with big names and cut them zero slack. Think of Sears, Toys"R"Us, Best Buy, CVS, Dollar Stores (600 Family Dollar Stores are set to close; 370 Family Dollar and 30 Dollar Tree), Walmart closed 11 in 2024 so far, Applebee's, Red Lobster, Stop & Shop, Rite Aid, Lehman Brothers (a 158 yr run), Bear Stearns etc.

Some can and will cover the NNN agreements on the closed locations, and some cannot, or will not.
Still, finding a new tenant could be hard and $$$, depending on location etc. I've seen empty locations for years before a new tenant.

With diligence, risk mitigation of portfolio composition etc., one can make NNN quite a good route.

Also , be sure to get a NNN pro to help negotiate the NNN lease structure, term, escalators, concessions, rights, specific responsibilities, tenant improvement allowances, etc. A solid comprehensive contract is worth a lot!

[Jeffrey Abraham]

Here are some pros and cons for triple net leases:

Pros of NNN Leases

1. Stable and Predictable Income
   • Long-Term Leases: NNN leases often come with long-term lease agreements (10-25 years), providing a stable and predictable income stream.
   • Creditworthy Tenants: These leases are typically with established and creditworthy tenants, reducing the risk of default.
2. Minimal Landlord Responsibilities
   • Tenant Responsibilities: Since the tenant covers property taxes, insurance, and maintenance, the landlord's responsibilities are minimal. This makes NNN leases attractive for passive investors.
   • No Property Management: You generally don't need to worry about property management issues, reducing your workload and stress.

[Joel Owens]

Hi Christian,

Sorry just seeing this post. NNN 20+ years

People work with me exclusive with written agreement to buy NNN.

If people want to just talk, explore NNN rate is currently 1,500 for 30 minutes or 3,000 for 1 hour on the phone.

If they sign agreement and buy something and we close where I make my fees then I give credit for consult fee.

My time is very valuable.

Good luck