Checklist for selecting the right NNN building
When you are selecting a NNN single tenant building with a tenant already occupying it, with a good lease, you still need to make sure the property itself has the right criteria for long-term success.
Here is a checklist of what I look for:
- 1. Current lease: First of all of course if the property is already occupied I want to make sure I study the existing lease and ensure there is at least another 5 more years left with the corporate guarantee and the standard yearly escalation clause.
- 2. Lease price: I would check what the current tenant is paying monthly vs. neighborhood prices. If they are a large tenant, and there aren’t that many years left on the lease, then I must calculate my cap rate based on a lower anticipated future rental income and I would pay less for that property.
- 3. Property condition: I want to make sure the current tenant has maintained the property in good condition especially if there is less than 3 years remaining on the lease. I would enforce whatever work they must do to maintain the property as agreed in the lease. Often as a Landlord, I could just send their corporate office a letter spelling out what I want them to do to maintain the property and if not I could get a crew to do the work and invoice them.
- 4. Area location: I want to choose a property in a great location. Great neighboring tenants. Heavy traffic, good parking nearby.
- 5. Building location: I want to even narrow it down to a corner building for instance, to have better exposure. Also I want the building to have excellent display windows in the storefront.
- 6. Property lay out: I prefer to choose a property with good and flexible lay out. Meaning it could have outside seating, or it does not have pillars right in the middle of the flow of the space and so on. This becomes very helpful if I need to change tenants for example from a retail brand clothes store to a restaurant or other use in the future.
- 7. Trend of area: I like to check the trend of an area and see if more growth is coming. Or there is more employment in the area or maybe the city or spending money on revitalizing the neighborhood etc.
- 8. Possibility for expansion: I would like to also see if I can add a floor or build an area in the back of the existing structure. This could be very helpful in case the current tenant leaves and a new tenant needs more space.
- 9. Comps: I look for comparable rents, sales and even look at vacant properties to see what they sell for compared to what I am paying for the one I am pursuing with a tenant.
- 10. Property value: I want to make sure the property has a lot more value than the price I am paying. This happens when I have many of the above criteria and I see not only the current numbers making sense but also the future outcome of the asset and what it could produce in future streams of income.
Often the opportunity is in the future and I may just breakeven for a year or two but on the third year or sometime down the road, I could get a better tenant or a expand the property and make more money etc. Each deal brings with it a set of challenges and opportunities, the idea is to reduce the risk and maximize the potential.
Wishing you the best NNN purchase.
Cherif Medawar
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