Best NNN Investments?

[Joe Strickley]

I keep coming back to NNN as being the best looking deals out there. Getting brokers to help in choice is impossible, and since deals are scattered all over the country, third party advise becomes inevitable. Putting that dilemma to one side, I'd be interested in any thoughts, or experiences on which tenants are considered good. To me the USPS has to be on that list, followed by Dollar General (especially in this climate), and then food and beverages like Starbucks, which has been closing stores, but nearly always occupies nice buildings, and finally banks especially ones with no exposure to CRE lending :)

[Don Konipol]

You need to also look at length of lease, rent escalation clauses if any, and alternative use for facility.

The stronger the tenant is, the less advantage the investment from the investors point of view. With a name tenant, escalation clauses in the lease will be few and far between. Most call for an adjustment every 5 years at 2% per year or less. If inflation kicks in by the 10th year you can be stuck with a property being rented at half the current market or less. With another 10 years or so to run, the value of the property will be severely discounted from the value of a similar property without the lease restraints.

As per retail locations, Dollar General is a great example. Dollar General has recently moved to a much larger type facility. The leases they wrote were 10 years with 3 five year options. In many markets they decided not to exercise options, and have built much larger stores in close proximity to the original store. So the landlord is now left with an empty store, no competitor wants to lease because DG is in area with a better facility, and the ballon mortgage payment is do. Further, these were set up at such low cap rates that the investor actually had negative cash flow, but theoretical equity buildup. with real estate values down and these properties hard to lease, the equity buildup is gone and so to may be the capital invested.

The point to realize is that even if everything turns out great with a NNN property, the competition is such that the investor gets a rate of return similar to a long term bond issued by the same company. The payoff would come from after the lease is up, IF the value of the property has risen with demand.

For a larger profit both cash flow and capital appreciation, the investor must lease to non credit tenants who have little market power and will pay a return reflecting a much higher cap rate. These properties can yeild double what a credit tenant NNN lease can yield. Of course the risk of default is increased also.