December 29, 2020 – By Chris Sands: Despite the challenges we’ve seen this year, 2020 has been very inspiring and eye opening in terms of demonstrating the stability of commercial real estate through shifting times. Generally, we are privy to understanding the market within a 10-year timeframe that includes adapting to market corrections—however, with the last global pandemic taking place nearly 100 years ago and an industry shift that wasn’t brought on by a market correction, it was a greater challenge than ever to anticipate and predict the outcome for investors.
Pre-2020, prices were strong and cap rates were low in the investor market. Buyers were looking to take calculated risks with their investments with their strong buying power. When COVID-19 paused the commercial real estate market, we saw three tiers of buyers emerge: those who took a complete pause, those who fully forged ahead with high-risk investments and those in the majority who took calculated risks on concepts expected to remain stable during the pandemic and beyond.
This time has helped identify and highlight product types that continue to thrive in a shifting market and are based on essential concepts and businesses suited to daily needs, including industrial, medical office, fast food, grocery, gas stations, day cares and automotive locations. We’ve seen a resurgence of investor confidence in these businesses that we expect to continue into 2021.
Many triple net investments are also lending themselves to the need we’re seeing for human interaction: as multi tenant offices, casual dining restaurants and brick-and mortar retail spaces reopen, we’re reminded that although their look and function may change in 2021, they’re used to creating essential culture and synergy between individuals, and product types that lean into people’s desire to connect will continue to thrive in the long term.
While we’re still facing the unknown into the new year with the developments of the pandemic and a new presidential administration, the new year brings a resurgence of inventory in the market. Investors continue to seek out long-term investments with high yield and are taking advantage of attractive lending instruments in a safe and strategic way.
Going into the new year, the fundamentals of real estate still ring true: good locations, good tenants and continued review and enhancement of an investor’s full portfolio. Now more than ever it’s critical to look at your full portfolio in order to identify key opportunities based on market outcomes. By keeping a smart and strategic mindset that aligns with their core principles, investors will have the ability to continually adjust to the changing market and maximize their return in the long term.
Chris Sands is the Founder and CEO of Sands Investment Group (SIG). SIG is a commercial real estate brokerage firm that specializes in the buying and selling of investment properties for private investors, developers, tenants, and institutions across the United States. Our industry knowledge, experience and vast network of buyers and investors are integral in our client-forward strategies. It’s also one of the fastest growing and most successful commercial real estate brokerage companies in the country, with advisors that are among the most distinguished and sought after in the industry.
This post was originally published in: National Real Estate Investor (NREI)
Sands Investment Group (SIG) is a commercial real estate brokerage firm that specializes in the buying and selling of net lease properties for private investors and institutions across the United States. Our industry knowledge, experience and vast network of buyers and investors are integral in our client-forward strategies.
Triple net lease (NNN) properties are often very attractive to investors who are seeking out an investment with consistent, equity-building returns without having to be involved in the day-to-day obligations and financial responsibilities of the property. NNN leases are also structured over a long period of time (usually anywhere from 10-25 years) so they can be an opportunity for consistent, long-term earning potential from the investment standpoint.
Investor interest has recently grown in a popular new class of net lease investments: car wash properties. Demand for car wash businesses continues to grow due to the vast number of cars on U.S. roads. These businesses also have a considerable advantage over other many types of retail—the internet cannot put them out of business. In other words, the only way to wash a car is to drive to the local car wash.
For real estate investors, 1031 exchanges create an opportunity for investors to move from one property to another and provide tax benefits for doing so. With the help of a tax-deferred exchange company, you can sell one or more property and defer the payment of capital gain taxes by acquiring a replacement property. This allows you to keep 100 percent of your money working for you instead of paying about one-third that equity to taxes. However, in a 1031 tax deferred exchange, there are very specific requirements that need to be followed.
When considering using a 1031 exchange for the sale of one property and the purchase of another, investors should consider the benefits they can gain from such a transaction. These 1031 exchanges are transactions that real estate investors often use to increase their wealth, save on taxes with the tax deferrals, and grow their portfolios. It’s a strategy that is used by many investors across the country.
Investing in commercial real estate can bring about many advantages in the form of low-touch income or a diversified portfolio. But not all commercial leases are the same, and even leases of the same type can have varying factors and deal details. In short, every commercial lease is usually as unique as the property itself, so it’s very important that you understand all the particulars and fine print of any property you’re considering adding to your portfolio.
Triple net leases, or NNN leases, are a very popular option for real estate. One type of NNN lease is a bondable lease. A bondable lease property has a long term tenant, of often ten years or more, with shared financial responsibilities between the landlord and tenant. Because of this, it can be advantageous for both property owner and business owner to have a bondable lease on the right property.
Many investors like adding NNN properties to their portfolios for the benefits offered for both the property owner and the tenants of the space. However, it’s important to understand the difference between triple net leases and bondable leases. While similar, there are some distinct differences that can be beneficial for landlords and tenants alike.
Read on to find out what a bondable lease is and the benefits in triple net real estate, for both landlords and tenants.
What is the Definition of Bondable Lease?
A bondable lease in triple net real estate is a variant of the NNN lease, in which the tenant carries the real estate risks and all operating costs for the property. These additional financial responsibilities may include:
- Rental fees for the property
- Property taxes
- Insurance premiums
- Maintenance and repairs for the property, including structure and roof
A bondable lease differs from a traditional NNN lease in that more of the financial responsibilities are placed on the tenant. In an NNN lease agreement, the structure, roof, plumbing and other costs may fall on the landlord; while in a bondable lease, it is on the tenant to take care of any issues that arise with these items. Another difference that can benefit the landlord is that often in a bondable lease, the tenant cannot terminate the agreement.
Considerations For Bondable Leases
When an investor looks into properties for a bondable lease agreement, there are many things to take into consideration, including the location and the tenant type. Once an investor has made a decision to offer bonded leases in the future, these specifics can help to narrow down the search for properties – and for tenants, in the future.
Location: A good, bondable triple net lease property, is often in a high growth area. These may be new cities, or areas attracting new residents at a higher rate. Popular parts of town, close to well established businesses, are often good bondable lease properties, as the area may be established with customers who can become customers at the new business.
Type of Business: When considering businesses to offer a bondable lease to, landlords should consider the longevity of the company. The best types of businesses for this lease type are ones not susceptible to economic or technological changes. These potential bondable lease examples may include grocery stores, convenience stores, dollar stores, medical offices, etc. These businesses are always necessary and will not shift too much during times of economic crisis.
Lease Terms: Each bondable lease will have its own terms, just like any other type of lease. Landlords need to consider the terms for their bondable lease, and ensure both they and the tenant understand what is expected in the terms. Because of the shared responsibilities, this understanding is especially important. Terms can include:
- Division of financial responsibilities
- Pass throughs of taxes and operating costs
- NNN lease insurance policies and premiums
- Rebuilding the structure if necessary (after hurricanes, tornadoes, etc.)
- General maintenance coverage for structural or roof damage
The Benefits of Bondable Leases
There are a wide set of benefits associated with NNN bondable leases. Both the property owner and the tenant have several benefits they can find with this type of lease, making this an attractive option for both sides of the agreement. Landlords like the ease of this lease type, and tenants can find more freedom. Generally, both sides of the lease can find more freedom in this agreement than in other NNN leases.
4 Benefits For Landlords
- Consistent Occupancy: Triple net leases are usually long term (somewhere between 10 and 25 years), so landlords will know they have a consistent, reliable income stream for that property. This can help to reduce the time and money spent on searching for new tenants or letting properties sit empty for periods of time. The regular rent, without additional costs associated with the property, can give landlords more freedom from spending time on the bondable lease property.
- Fewer Responsibilities: With a bondable lease, landlords do not have as much responsibility as other types of leases. The responsibility for property taxes, insurance premiums and maintenance or repairs falls on the tenant. This gives the landlord more freedom and time to focus on other projects or properties.
- Predictable Cash Flow: Because of the consistent occupancy and the limited responsibilities landlords of bondable leases have, they can find a passive source of predictable income, allowing them to know how much money they will bring in each month for a set amount of time and freeing up their focus for new or other properties.
- Low Risk and High Return: NNN leases each have their own terms, but because most (if not all) of the risk is passed to the tenant, landlords often see these properties as low risk and high return. Again, the bondable lease property gives landlords the freedom to continue to add to their portfolios in other ways.
Each of the benefits a landlord finds can free up their time, money or energy to focus on new projects and other properties. This can help investors continue to grow their portfolios.
3 Benefits For Tenants
- Established Location: As a business owner, it can be challenging to have a shorter-term lease. With the long-term lease afforded by the bondable net lease, tenants can have an established location their customers can rely to be there for many years. This can give them the freedom and opportunity to grow a stronger customer base.
- Long-Lasting Footprint: With a stronger customer base at an established location, tenants can develop a long-lasting footprint in the area. They can focus more on building their business, rather than finding a new place to do business every few years. By creating a long-lasting footprint, tenants can grow their in-the-door traffic for their business, giving them the freedom to become a part of the community.
- Property Control: With a bondable lease in triple net real estate, the tenant is responsible for the property they are renting – which means they have more control than in other types of leases. If the tenant notices a maintenance issue, they can go ahead and get it repaired as they see fit, without needing to involve the landlord. This gives them the ability to fix issues as they arise and on their schedule, often resolving problems quicker than they may otherwise.
Tenants can find freedom to build their business and establish themselves in their community because of the longevity of their bondable lease.
Investing in Bonded Lease Properties
Once an investor has decided to invest in bonded lease properties, it can be helpful to do some research on the types of properties for the tenant types the landlord is interested in working with. A net lease real estate expert can help investors sift through the listings to find the best properties for their needs. They know the right questions to ask when looking at listings and how to decipher the fine print on existing leases. This will help the investor know what responsibilities they might inherit in a new property with an existing tenant.
A net lease advisor can help landlords understand the pros and cons of bondable leases. These experts know market trends and know the longevity of different types of investment locations that may be good for a bondable lease property. A bondable lease expert can help find the right property for ongoing, consistent income for property investors.
Sands Investment Group is America’s fastest growing net lease investment company, with over 2,200 transactions in 48 states (to the tune of $4.7 Billion) since 2010. Our experienced team of net lease advisors and brokers are experts in the NNN market and can help you find your next best investment opportunity by helping you navigate through all the opportunity and risk factors of every NNN property that meets your investment goals.
Want to learn more? Get in touch with an expert net lease advisor today by calling 844.4.SIG.NNN or sending us an email at info@SIGnnn.com.
SIG brokers successfully handled the transaction on a CVS drugstore in Atlanta, Georgia despite facing multiple challenges.
Working with SIG brokers is the best way to leverage top listings, lending, and marketing efforts for commercial real estate in Atlanta. In this deal, lead SIG broker Amanda Reeves and co-brokers Doug Roland, Dan Hoogesteger, and Danny Held successfully closed a CVS transaction despite facing challenges with the age of the listing and multiple instances of the deal falling out of escrow.
Triple net leases are popular options for landlords and tenants alike. They aren’t your standard commercial lease agreement. They give property owners a consistent income stream with more time to focus on other projects, as day to day maintenance is typically passed to the tenant. This gives the tenant more control over the property, allowing them to make repairs when needed and sometimes even update the property as they see fit for their business. The costs associated with the property are split up between landlord and tenant in a different way than most other leases.
SIG brokers successfully closed the transaction on a 7-Eleven convenience store on Shiloh Rd in Dallas, TX.
Working with SIG brokers is the best way to leverage top listings, lending, and marketing efforts. In this deal, lead SIG broker Tyler Ellinger and co-broker Matt Montagne and William Hartshorn handled a successful transaction on a 7-Eleven business for sale in Dallas, Texas.
Investors are often attracted to NNN leases, or triple net leases, because of the consistent income stream they can provide while still being a lower risk property. These types of leases are a long-term solution for tenants, while providing property owners with plenty of benefits as well.
Triple net lease (NNN) real estate offers investors a way to secure a consistent revenue stream without having to play all the traditional roles and take on the many obligations of being a landlord. In an NNN lease, the tenant at the property will typically cover the major operational expenses of the property as part of the business expenses. These costs covered by the tenant usually include property taxes, insurance, and maintenance or upkeep on the space they’re renting for their business.
If you’re looking for your next high-reward real estate investment, especially regarding commercial properties for lease, it’s important to understand what goes into financing a triple net lease property, otherwise known as NNN financing. NNN properties for sale are leased to a single tenant who takes on additional expenses beyond the usual rent and utility payments. These additional expenses include real estate taxes, maintenance and building insurance.
A lease of this type carries benefits and drawbacks for both the lessor and lessee. Let’s take a look at what triple net, or NNN, leasing is and what it can mean for your efforts before we get into financing.
What Is a NNN Lease?
Before we can look at NNN financing, it’s important to understand what a net lease is. In this form of commercial real estate lease, the tenant takes on the burden of some or all of the normal ownership and maintenance costs of the building. They may, in addition to rent, pay some of the taxes, repair and maintenance costs, or other fees associated with the property.
In a single net lease, for example, the tenant pays property taxes. With a double net lease, the tenant pays for property taxes and insurance. The triple net lease passes on the maximum level of expenses to the lessee.
An Overview of the Triple Net Lease
When a property owner offers a triple net commercial lease, the tenant takes on the additional responsibilities of property taxes, the cost of upkeep on the building and any insurance, as well as normal rent payments. This can save the building owner a great deal of money because the lessee is responsible for the same level of expenses as the owner might normally take on.
For the lessee, the rental costs are generally less than they would be otherwise. Essentially, the building owner passes on their savings in the form of reduced leasing costs. Such leases are also popular for business owners and operators for a number of reasons:
- They tend to be for 10 or 15 years, with a controlled escalation of rent, which allows for long-term business operations.
- They allow for the tenant to make whatever repairs or upkeep are needed without reliance upon landlord cooperation.
For investors, triple net properties also carry a range of benefits:
- Investors receive a stable income over a long-term agreement.
- The property in question will presumably appreciate in value at little to no cost to the owner.
- There are no worries regarding management issues.
- There are no concerns about filling vacancies.
- Building improvement costs are nil, or close to it.
- When a triple lease investment property is sold, capital can be rolled over into a 1031 exchange to save money to take advantage of tax deferment.
Low Risk, High Reward
If you’re looking to get into a property deal that carries a very low risk for a very high reward, it’s hard to beat a NNN lease property. Again, leases range from 10 to 15 years, or even as long as 25, so there’s stability in such a property. It’s governed by a single set of agreements, which means you don’t have to negotiate raises in rent, building improvements or other costs.
Hands-Off Management for a Single Renter
Again, you’re dealing with only a single tenant with this kind of lease deal, and they’re taking on all of the responsibilities of maintaining the property. That means you can be a completely hands-off landlord, stepping in only when there’s a major problem (such as the tenant failing to uphold their end of the agreement).
Steady Income with No Surprises
You can, through your lease property, enjoy a steady income with no surprises and relatively few headaches. After all, you don’t have to be concerned with paying out insurance or taxes, let alone upkeep, repairs and maintenance. All of that is taken care of by your tenant. In some ways, it can feel like easy money. There’s no such thing, of course, but a NNN lease can feel that way once it starts moving along.
Pay for Mortgage and Financing
The goal for just about any lease property is to cover your fees related to the mortgage and financing of the property. A NNN lease is ideal for this purpose. Working with a reputable triple net advisor can offer a number of different options for financing that can fund your purpose, and your lease agreement will immediately help to pay off those monthly regular costs.
Buying a commercial real estate investment property of this sort has specific financial requirements. The investor has to have a minimum accredited net worth of $1 million. This excludes up to $200,000 in income or $300,000 if the purchasers are joint filing, or excluding the value of the filer’s primary home.
This can, of course, make it tricky for a smaller investor to take advantage of triple net lease properties. There are channels open to such smaller investors, however, including REITs, or real estate investment trusts, which are geared specifically toward NNN properties for sale. Here are a few more things you need to look for when considering financing NNN properties for sale.
Is the Tenant Credit or Non-Credit?
If your tenant holds an investment-grade rating from Fitch, Moody’s or Standard & Poor’s, or is a large publicly traded company, you’ll have a low risk when you buy the property, but you’ll also likely pay significantly more and get a far lower ROI when all is said and done.
On the other hand, a smaller independent business like a privately owned shop or restaurant is a higher risk because they’re not as financially stable. You will often, however, get the property at a lower price and get a greater return on your investment.
Get Up to Speed on Lease Agreements
When you buy net lease real estate, you’re almost always getting a property that is already occupied by a tenant. The property will come with a lease agreement. Make sure you understand how these lease agreements work. Look into the remaining lease term and any renewal options the tenant may have. Your loan will be directly related to the terms of that lease.
Put simply, for the most part the lender will offer a financing term on the NNN property for sale that is based on the remaining years. If there are five years left on the current lease, your loan term will likely be five years. If there are 10 years left, you can expect a 10-year loan. For the most part, lenders offer loans with terms of five, seven or 10 years.
Know Your Lenders
Financing NNN properties for sale usually involves either a federally insured bank or credit union, or a private lender. The best loan options usually come from federally insured institutions, which will offer the most competitive rates and the most favorable terms.
Private lenders are almost always more expensive. If, however, you’re facing a time crunch or are looking for a temporary loan financing solution, a private bridge loan can give you the time you need to negotiate a long-term lease while you seek to get better financing options from a bank or credit union.
Know Your Tenants
In the end, regardless of which institution you choose, the major factor will be as much tied to the credit rating of your tenant as it will be to your credit rating. The better your tenant’s credit rating is, the better your lease terms will be. This is largely because the lender is aware that you will be depending on the tenant’s rent and fees to pay your responsibilities to the bank. If the tenant has poor credit, that makes the sale a bad risk so finding the best NNN tenants is key.
Are triple net leases a good investment?
Absolutely, and we’re here to help you through the process. Check out our complete guide on investing in triple net properties and what to look for.
Seek Expert Advice From SIG
If you need assistance with triple net financing your best bet is to seek expert advice and guidance. You’re making a massive investment when you purchase a single tenant net lease property, and you need to carefully consider a wide range of factors. Location is as important as it is with any commercial property for sale, as is the punishment it’s taken from prior tenants and the possibility for future use.
Working with the best team of skilled and experienced advisors, like those at Sands Investment Group, can provide you with the right financing guidance and support to avoid critical mistakes and ensure that the process goes as smoothly as possible. SIG has experience and knowledge in all forms of triple net properties for sale, along with the expertise to save you a great deal of hassle and hurdles in the process.
Sands Investment Group is America’s fastest-growing net lease investment company, with over 2,200 transactions in 48 states (to the tune of $4.7 billion) since 2010. Our experienced team of net lease advisors and brokers are experts in the NNN market and can help you find your next best investment opportunity by helping you navigate all the opportunity and risk factors of every NNN property that meets your investment goals.
Want to learn more? Get in touch with an expert net lease advisor today by calling 844.4.SIG.NNN or sending us an email at info@SIGnnn.com.
SIG brokers successfully handled the transaction on a 2-tenant medical office in KY, meeting the seller’s non-negotiable pricing expectations.
Working with SIG brokers is the best way to leverage top listings, lending, and marketing efforts. In this deal, lead SIG broker Amanda Reeves with co-brokers Clifton McCrory and Chris Sands closed the transaction on a 2-tenant medical office property in Kentucky.
Named Rookie of the Year for 2004 at Marcus & Millichap, Chris Sands launched his own business in 2010. His vision for Sands Investment Group was to establish a highly-specialized and knowledgeable company able to provide buyers and sellers of net leased properties with a level of service unprecedented in the industry. To this endeavor, the former professional tennis player applied the drive and termination that enabled him to compete at the highest level of his sport. Read more
NNN properties can be quite lucrative for investors who are looking for a long-term, low-touch, and high-return investment property. Triple net lease property investments are a low-risk way to build equity and gain a consistent investment revenue stream, but as with any commercial real estate transaction, there is a specific process that must unfold successfully for an NNN property transaction to be completed.
SIG brokers handled an off-market property transaction with a 1031 Exchange for a repeat buyer.
Working with SIG brokers is the best way to leverage top listings, lending, and marketing efforts. In this deal, SIG broker Teddy Leonard was able to close a 1031 Exchange deal on a Steak ’n Shake property for sale before it hit the market.
SIG brokers successfully closed the transaction on a large Safeway grocery store property in Eugene, OR, bringing in a buyer for a non-exclusive listing.
Working with SIG brokers is the best way to leverage top listings, lending, and marketing efforts. In this deal, lead SIG broker Andrew Chana with co-brokers Dan Hoogesteger, Chris Sands and Andrew Ackerman brought in a buyer for a non-exclusive Safeway listing in Eugene, OR.
SIG broker successfully managed the transaction on a vacant Sizzler property in Lomita, CA.
Working with SIG brokers is the best way to leverage top listings, lending and marketing efforts. In this deal, lead SIG broker Dan Hoogesteger brought in a buyer for a vacant Sizzler property for sale in Lomita, CA.