As investors seek the next right opportunity to add to their portfolios, there are a number of businesses that can make a good fit. Sometimes, investors have focused solely on one type of business in the past, but may be looking to expand into a new industry. Other times, an investor might be looking to sell off one property and invest in another one. And yet other investors simply want to add to their portfolio in an industry that they know will not be going away any time soon.
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.
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.
The COVID-19 pandemic has created sudden change in the economy and is certainly having an impact on commercial real estate buying, selling, and financing. The lending environment itself has tightened up considerably, making it much more difficult to obtain and secure financing. Banks are overloaded with the PPE program and timelines are extending, making it difficult to stay agile and move quickly when an investment opportunity does become available in the market.
As a result, many operators are looking into their existing portfolios and trying to identify opportunities to leverage equity and raise cash to move on new opportunities, make property improvements, or strengthen their cash position for operations. At Sands Investment Group (SIG), one of the strategies we are using to create capital and leverage opportunities in the current economic state is sale leasebacks.
A sale leaseback is a financial strategy in which a property owner sells their commercial property and retains a long-term lease with anywhere between 40-50 years of control. This option can create capital necessary to move on other new business opportunities, reduce bad debt and costs, and potentially reduce the overall occupancy cost for the business.
Here are three ways Sands Investment Group is using sale leasebacks to help operators weather the current financial situation brought about by the COVID-19 pandemic and come out the other side stronger than ever.
1. Get rid of bad debt and trade it for reasonable landlords.
In the current economy, banks have become more rigid in their lending and financing practices, which is causing undue pressure on investors who need the flexibility to move quickly when a commercial real estate investment opportunity becomes available in the market.
A sale leaseback provides you with the opportunity to reduce debt loads by selling a property while staying on as a tenant with a fixed lease payment. This allows you to retain your initial capital investment in the property. This option can also provide more operating capital for your business and provide a more favorable, humanized landlord-tenant relationship.
2. Identify ways to reduce occupancy costs.
At SIG, we are finding that principal and interest payments on highly leveraged assets are commonly held for a higher monthly payment than a rolled or fixed cost at today’s CAP rates. Additionally, in a sale leaseback—as an operator—you will be able to both recoup your initial down payment and pay off all debts.
In uncertain times like these (where every penny counts), SIG is looking for ways to forecast post-COVID sales for businesses. We’re also looking for every possible way to reduce overall occupancy cost of real estate and stack up the war chest so we not only have a runway to operate the business, but make sure funds are available for post-COVID opportunities.
3. Raise capital for future buying opportunities.
Most of the deals on the table today are prompted by quick fixes and the ability to come to the table with cash, and for most of us, that cash is sitting in our existing real estate investments. A sale leaseback strategy provides necessary capital for future investments or buying opportunities.
The common sentiment in the market is that this disruption is going to turn into opportunities. In this way, COVID-19 has accelerated selling or retiring from the business, creating opportunities for investors who are looking to expand.
Overall, SIG is providing a capital solution to fund portfolio acquisitions and growth opportunities as they arise.
About Sands Investment Group
Sands Investment Group has extensive experience in all types of commercial real estate and is an industry leader in the net lease investment space. We can help you navigate and advise you on how to leverage your existing assets in the current economic climate and create capital to fund your future investments.
With over 2,200 transactions in 48 states worth $4.7 billion since 2010, Sands Investment Group is the fastest growing net lease investment company in America. We provide highly personalized client services, employ innovative marketing techniques, and have access to an extensive network of investors to help you find the perfect investment or sell a property you own for the best profit.
Want to learn more sale leasebacks and other investment opportunities that don’t require you take on any more debt? Get in touch with an expert today by calling 844.4.SIG.NNN or sending us an email at info@SIGnnn.com.
SIG brokers handled the transaction on a Kohl’s triple net lease portfolio containing 4 different properties across 2 states.
Working with SIG brokers is the best way to leverage top listings, lending, and marketing efforts. In this deal, SIG brokers Chris Sands and Clifton McCrory were able to bring in a double-digit number of offers on this Kohl’s portfolio through consistent marketing and investor outreach efforts.
- Kohl’s: Chillicothe, OH; Noblesville, IN; Centerville (Dayton), OH; Findlay, OH
- Property Type: Big Box
- Client Type: Recurring SIG Client
- Price: $33,000,000
- CAP Rate: 7.25% (Learn More About Net Lease CAP Rates)
- Challenge 1: Kohl’s didn’t have a strong reputation over the past 18 months, so educating the buyer pool on the investment opportunity of the portfolio was key
- Challenge 2: Pricing the portfolio was tricky because there were very few big box or Kohl’s comps that had sold recently
- Leveraged connections and marketing to bring in the right buyer, generating a double-digit number of offers, both for singular properties and the full portfolio
- Educated the buyer pool on the investment opportunity
- Placed client goal as a top priority
- Sold very close to asking price
- SIG consistently called on their network of investors to bring in offers
- Over $4,500,000,000 in Closed Transactions
- Over $700,000,000 in Active Inventory
- Over 1,900 Transactions in 48 States
- Focused on Creative Marketing
- Net Lease Industry Leader
- Real Estate Forum Influencers in Net Lease 2019
- SC25 Fastest Growing Companies, 2017 & 2018
- Real Estate Forum Names SIG to Its List of Commercial Real Estate’s Fastest-Growing Companies, 2016 & 2015
- CoStar Power Broker Top Firm Awards, 2017 & 2016
Interested in acquiring a big box property for consistent returns in your investment portfolio? SIG handles new loans on locations for clients who are seeking to expand their portfolio and acquire NNN properties in all different niches. When the goal is growing an investment portfolio with specific properties, you can’t trust a typical real estate agency to walk you through the process. SIG is a commercial real estate brokerage firm with a wealth of experience helping clients find, secure, and purchase properties to round out their investment portfolio.
SIG brokers handled a unique deal for a recurring client who wanted to add 2 discount/dollar stores and 1 big box properties to their portfolio (Five Below, HomeGoods, and Hobby Lobby, respectively) across 3 different transactions in the course of 6 weeks.
Working with SIG net lease brokers is the best way to maximize your investment portfolio, and they know how to navigate complex, multi-location transaction where timing is essential. Co-brokers Adam Scherr, Chris Sands, and Dan Hoogesteger successfully led one of SIG’s recurring clients through a multi-location portfolio acquisition involving 3 different locations that all closed within the same 6-week period.