4 Reasons Why NNN Properties Are Ideal Investments

A triple net (NNN) lease is an increasingly popular form of a rental agreement between tenants and landlords or investors for commercial real estate. Though a majority of the financial responsibilities fall on the tenant, NNN leases are still heavily favored and preferred, even when compared to other variations of net lease agreements. NNN leases present several benefits to tenants and investors alike, which makes them ideal opportunities for the new or seasoned investor. Below are four reasons to consider investing in NNN lease properties.

NNN Lease Properties Require Minimal Management

A NNN lease puts almost all of the financial burden in the hands of the tenant. By definition, NNN leases require very little management from the investor, as the tenant is responsible for the agreed upon rent as well as the property insurance, property taxes and property maintenance.

This simplicity and lack of financial obligation is beneficial for investors, but these terms also provide a sense of control to the tenants. Occupants do not need to wait weeks on general property maintenance from an overwhelmed landlord and enjoy the greater autonomy offered by a NNN agreement.  

NNN Lease Properties are Favored by Reliable Tenants

NNN lease properties are often chosen by secure, reliable tenants, as they are aware of the responsibilities they incur. Tenants that favor NNN lease properties frequently include retailers such as gas stations, mattress outlets, fast-food restaurants, convenience stores and grocery stores.

Multi-tenant property sets prefer NNN leases because the rents tend to be lower. Additionally, with the responsibility of property insurance, taxes and maintenance, the business owners have the incentive to keep costs low. These types of tenants allow investors to comfortably offload the burden of the additional property expenses while maintaining a dependable and steady source of income.

NNN Lease Properties are Stable Investments

The stability and predictability of NNN investments are appealing for both parties entering the agreement. The structure of a NNN lease is known from the outset, and the entities that prefer NNN leases provide predictable sustainability and accountability for the well-being of the property itself. Additionally, the typical occupants of a NNN property are often impervious to the effects of the rise of e-commerce, which facilitates long-term rental agreements and builds quality relationships between tenants and landlords.

NNN Lease Properties Diversify an Investment Portfolio

NNN leases are integral components of any sophisticated investment portfolio. These types of properties are typically low-risk and tend to deliver passive, steady income with little to no management required. A long-term, stable, but potentially lucrative asset into a portfolio allows an investor to achieve an imperative balance dynamic. Additionally, acquiring a NNN leased property provides an investor with the ability to focus on other high-risk, hands-on investments. These attributes of a NNN lease property simplify the process of investment portfolio diversification, which is essential to avoiding market fluctuations.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!


The Difference Between NNN Leases and Absolute Net Leases

In commercial real estate, several types of leases accommodate a range of different economic responsibilities between the tenant and investor. These leases include single, double or triple net (NNN) leases; percentage leases; gross leases; modified gross leases; pass through leases and absolute net leases.  When investing in commercial property, it’s important to have proper expectations before signing any type of lease. NNN leases are often confused with absolute net leases and making a discernible distinction is integral to understanding your commercial real estate investment and responsibilities.

What is a NNN lease?

In a NNN lease, the tenant is responsible for taxes, insurance, and general building maintenance, and the landlord or investor is removed from almost all of the financial obligations. However, the roof and structure of the property are not traditionally included in the tenant’s list of maintenance responsibilities. NNN leases are typically longer-term for commercial real estate properties and have initial terms that begin at 10 years or more. Accordingly, NNN leases are very popular as they provide multiple benefits for both tenants and investors.  

What is an absolute net lease?

In an absolute net lease, sometimes called a bondable lease, the tenant is responsible for rent and all other property related expenses, which includes roof and structure. This agreement completely relieves the property owner or investor of all financial obligations. An absolute net lease is a variation of the NNN lease that is commonly used when the investor has borrowed money to finance the commercial property and opts to put additional risks in the hands of the tenant.

Why are NNN leases and absolute net leases often confused?

The confusion between NNN leases and absolute net leases often initiates from an inaccurately advertised NNN lease, or a misunderstanding of the different leases on either the investor’s or the tenant’s behalf. When a property is advertised as a NNN lease, the investor may make the purchase under the assumption that all expenses are the tenant’s responsibility and unintentionally incur a massive financial expenditure in the future. In another scenario, and because ”NNN lease” is a more popular phrase than “absolute net lease,” the property may be listed as a NNN lease when the terms describe an absolute net lease. This risks blindsiding the tenant later on with a hefty roof or structural repair bill.

What are the best ways to avoid confusion between NNN leases and absolute net leases?

Investors and tenants can avoid confusion between NNN leases and absolute net leases by performing ample research on the different types of leases. The parties involved must also be well-versed in both the particulars and the fine print of a lease before signing. Additionally, commercial real estate brokerages offer expertise and information on all different types of agreements and investments. To maximize the returns of a commercial property investment, it’s always best to consult professionals.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!


Single Tenant Net Leases Versus Multi-Tenant Net Leases: Which Is a Better Investment?

Commercial real estate presents investment opportunity in a variety of formats. Investors typically decide between either a single tenant net lease property or a multi-tenant net lease property. As both types of investment opportunities offer several pros and cons, preference is often circumstantial. Below is an in-depth analysis and comparison—read on to enhance your understanding of single and multi-tenant net leases.

What are single and multi-tenant net leases?

A single tenant net lease is a rental agreement between the sole occupant of a one-unit space and its owner or landlord. A multi-tenant net lease is a rental agreement between several occupants or renters in a larger, multiple-office property. Net leases require the tenants to assume responsibility for some or all of the additional costs associated with a commercial property on top of the agreed-upon rent. Accordingly, net leases are popular types of rental agreements in commercial real estate, as they benefit both the tenants and the landlords. Different forms of net leases, such as single, double or triple net leases, entrust the occupants with incrementally increasing responsibilities, which gives landlords and tenants an array of choices for various scenarios.

Single Tenant Net Lease: Pros and Cons

Single tenant net lease properties are often appealing to first-time investors because of their simplicity. With only one tenant to attend to, the management requirements are far less demanding. Single tenant net leases also typically average between 10-20 year terms, which is advantageous for long-term budgeting and planning. Additionally, single tenant commercial real estate agreements are very often designed as triple net leases, which almost entirely alleviate the landlords of property obligations.

However, investing in a single tenant property relies heavily on the quality of the sole tenant. If the occupant’s business fails or encounters financial trouble, the investor’s primary source of income is significantly limited if not eliminated. A completely vacant property has a detrimental impact on a commercial investment. Aside from losses associated with the vacancy itself, upkeep, improvements, insurance and other affiliated costs begin to diminish overall return rates until a new tenant is found.

Multi-tenant Net Lease: Pros and Cons

As multi-tenant net leases rely on a multitude of occupants, the likelihood of total vacancy is very low. Multi-tenant net leases typically average seven years, which leaves room for relatively frequent adjustments. Additionally, investors lean toward a multi-tenant property because they prefer to close on several units at once instead of several individual endeavors. This approach is often perceived as more efficient and more economical, as it reduces transactional closing fees and procedures.

Contrarily, a multi-tenant property also signifies increased duties and responsibilities. Multiple occupants require more active management due to specialized, individual needs. Furthermore, these properties are often considered a higher-risk investment, as they are more susceptible to significant value loss during an economic downturn and also require periodic capital contribution for maintenance or improvements. These risk factors combined with the typically higher turnover rate of multi-tenant property occupants result in higher interest rates from lenders.  

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!


The Need-to-Know Considerations of a Triple Net Lease Investment

A triple net lease, often called a net-net-net (NNN) lease, is a commercial real estate agreement in which the tenant agrees to cover the net real estate taxes, building insurance, and maintenance fees in addition to the agreed-upon rent. Every triple net lease is different, however, and typically has unique scenarios and parameters. Accordingly, an investor, landlord or tenant must perform a thorough assessment of the agreement before proceeding. Below are the most applicable considerations regarding triple net lease investments.

Unit Economics

Unit economics outline the direct revenue and cost associated with the business model within the space. A proper unit-economics assessment enables the investor to determine the relative likelihood of lease renewal as well as predict potential profits. The type of tenant and operational expectations will greatly affect the unit economics, and thus the parameters and considerations of the NNN lease. A Starbucks has different operational expectations than a Mattress Firm, for example, and may want to negotiate a different NNN lease structure. Unit economics analyses are also helpful in comparisons between similar or neighboring locations.

Tenant Quality

Tenant quality in commercial real estate refers to the expected reliability, character and performance of an occupant. Low-risk tenants are typically favorable, primarily because NNN leases often involve single-tenant properties. An investor cannot risk the possibility of losing all forms of cash flow to cover expenses if a high-risk tenant fails and declares bankruptcy. High-risk tenants, however, offer the potential for higher cap rates and higher cash-on-cash returns, and different investors may prefer different levels of risk.

Rent and Term Length

Long-term triple net leases provide stability and longevity, but an investor must pay careful attention to ensure adequate stipulations and predetermined rent raises to account for inflation. Neglecting to account for the gradual decrease in the value of the dollar can cut into profit margins or offset them entirely, depending on the length of the NNN lease. Additionally, triple net leases can include renewal options, which provide investors, landlords and tenants with a viable alternative to a long-term contract. Triple net leases with renewal options are worth considering for less-proven business models.

Early Termination

An early termination clause gives the tenant the ability to sever ties before the lease term is completed and results in a severe risk of cash flow loss in an investment. A tenant is typically required to give ample notice of early termination accompanied by a lump sum payment.

Co-tenancy

A co-tenancy clause is a provision of a retail NNN lease agreement that specifies terms for the potentialities of neighboring businesses. Co-tenancy clauses offer the tenant some form of protection against a major competitor moving next door, or if an anchoring, adjacent business ceases operation or relocates. These types of scenarios can result in a significant change in consumer traffic and tenants may negotiate a co-tenancy clause as a precaution.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!


4 Ways to Determine the Value of an Investment Property

The value of a commercial or retail property heavily influences its operational performance, the tenants’ leasing options and the investment yield. Investors and appraisers utilize several different methods to determine the value of a property, often depending on the type of real estate, the availability of information or the goal of the investment. Gain insight into four of the most common methods below to accurately assess the value of single and multi-tenant commercial properties and maximize your profits from retail real estate leasing.

The Income Approach

The income approach is a frequently used method for evaluating a commercial property. In this situation, the value of a retail investment property relies on the interpretation of the net operating income (NOI) and the capitalization rate (cap rate). The NOI of a retail property is determined by subtracting operating expenses and vacancies from the overall potential rental income. The cap rate predicts the annual rate of return by dividing the NOI by the most recent value of the property.

By evaluating these factors, the investor focuses on recent sales and operational figures. The income approach also allows for simple adjustments to account for unique scenarios, such as likely tenant additions or scheduled maintenance.

The Cost Approach

The cost approach method considers the cost of the land plus the cost of constructing the “highest and best use” building from scratch. For example, if the piece of land is worth $100,000, and constructing a multi-tenant retail property would cost $1.2 million, the cost approach would value this commercial real estate at $1.3 million.

This approach is commonly used for new construction and vacant lots. The simplicity of the cost approach is appealing to investors and appraisers. Additionally, the cost approach accommodates for unique factors such as zoning laws to yield an accurate and current valuation.

The Capital Asset Pricing Model

The capital asset pricing model (CAPM) is a comprehensive approach to assess a commercial or retail investment property that includes risk and opportunity cost. The CAPM considers the return on investment (ROI) on a risk-free investment, and labels it as a control, which is referred to as “beta.” Frequently-used betas include US Treasury bonds or real estate investment trusts (REITs). This valuation method is based on the comparison of expected returns between a guaranteed investment and the property in question. If the potential returns on a bond exceed those of a retail investment property, the investment isn’t financially advisable.

The CAPM assumes inherent risk and natural economic behavior that doesn’t always meet expectations. Accordingly, net lease investors find the CAPM useful for estimating the value of a property investment, understanding the approximate risks and establishing optimal tenant leasing structures.

The Sales Comparison Approach

The sales comparison approach (SCA), sometimes referred to as the market approach, utilizes prices from similar and nearby commercial or retail investment properties. This method takes the property’s general attributes into consideration and is best applied over a significant period of time. Investors and appraisers rely on the uniform metrics in this approach, such as price per square foot and recent sale price, to determine the value of the commercial real estate in question.

The SCA has the advantage of simplicity and accessibility, but often neglects the uniqueness and distinctive characteristics of a commercial property. Investors and appraisers find the SCA useful to gain insight on neighborhood pricing trends or for quick property valuations.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!


What is a Cash-On-Cash Return?

Investing in commercial real estate requires accurate analysis of profitability and returns to assist with the evaluation of each opportunity. The cash-on-cash return formula is a calculation commonly used by investors and retail real estate leasing brokers to provide valuable insight into a property’s return on investment (ROI). Below is a breakdown of everything you need to know regarding cash-on-cash returns.  

Cash-On-Cash Return Formula

A cash-on-cash return is a simple formula that determines the annual return rate generated on a property compared to the amount invested. To discover the cash-on-cash return rate, divide the annual pre-tax cash flow by the total cash invested.

Cash-On-Cash Return = Annual Pre-Tax Cash Flow / Total Cash Invested

Breaking Down Cash-On-Cash Return

The annual pre-tax cash flow is deduced by subtracting vacancies, operating expenses and mortgage payments from the total amount of revenue generated from tenant lease payments and other forms of income from the current period. This number is the building’s net operating profit.

The total cash invested refers to the amount of money spent in cash throughout the current period. This includes the down payment, any additional closing costs, insurance premiums, maintenance and other various expenses.   

As most commercial real estate investments demand long-term debt borrowing, the actual ROI differs from the yearly liquid return. Determining a commercial property’s cash-on-cash return rate provides a more precise portrayal of the investment’s current cash value because it does not consider debt. The cash-on-cash return rate can also be used to predict the potential cash circulation of a commercial investment opportunity. An investor may then extrapolate the resulting percentage to estimate expected returns on the life of their ideal investment.

Cash-On-Cash Return Example

Suppose an investor wants to assess a single-tenant property to gauge potential profit margins. The proposed lease outlines an agreement that requires the tenant to pay $80,000 in rent. The investor would ultimately pay $50,000 in mortgage payments, including interest premiums. The purchase would require a $90,000 down payment and $10,000 in closing costs from the investor. The annual pre-tax cash flow, in this case, is $30,000 (rent revenue – mortgage payments). The total cash invested in this scenario is $100,000 (down payment + closing costs). This results in a cash-on-cash return rate of 30 percent.

Limitations of the Formula

Though a cash-on-cash return provides valuable intel, its simplicity renders it limited in some regards. Not only does the equation exclude debt, but it also neglects any appreciation or depreciation on the property. Additionally, the cash-on-cash formula fails to account for potentialities such as risks and unforeseen maintenance costs. It’s important to understand that the cash-on-cash formula is best used to calculate simple interest and returns, or the total cash earned in relation to the total cash invested.  

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!


Common Cap Rate Mistakes

The capitalization rate, or cap rate, provides investors and landlords with valuable insight regarding the specifics of commercial real estate investments. If interpreted properly, the cap rate can be used by investors to compare and contrast similar investment opportunities, and landlords can include it in their decision as to whether or not to sell a commercial property. There are several instances in which cap rate can be leveraged as an effective metric, but it is often misinterpreted, misunderstood or misused. Below are the most common mistakes associated with cap rate in terms of commercial real estate investments.     

Mistakes Calculating Cap Rate

Though the cap rate formula is straightforward on the surface, its very few components, net operating income (NOI) and overall property price, are comprised of complex elements. A cap rate is often a projection of future expectations, and inaccurate NOI estimates will significantly affect the resulting percentage.

The factors involved in calculating NOI include complicated and ambiguous terms such as expected vacancy or alternate income. These pieces are influenced by an overwhelmingly large pool of external forces and can fluctuate frequently and unexpectedly. It’s imperative to precisely calculate each step of the NOI formula before determining a property’s cap rate.  

Misunderstanding Limits of Cap Rate

Cap rate should never be used as the sole deciding metric for an investment property. Countless other factors must be considered before choosing to buy or sell commercial real estate. Cap rate alone is not an effective assessment for short-term investments as it does not account for the value of potential improvements or appreciation.

Additionally, cap rate on its own does not consider the time value of money, which makes it difficult to apply to long-term investments. A cap rate serves merely as a glimpse at the one-year expected rate of return based on previous averages and should not be used for more than it’s intended.

Furthermore, cap rates are limited indicators, as they can be considered high in one market, and low in another. Location, supply and demand, types of property, types of leases and other factors all have a significant impact on the cap rate value and worth.         

Misinterpreting a High or Low Cap Rate

One of the most common mistakes investors make when interpreting cap rate is assuming that a high cap signifies a better investment. Though a high cap rate does present the opportunity for higher returns and a lower overall purchase price, it also indicates a higher risk. A property with a high cap rate may be in a less desirable location and have a higher vacancy and older amenities, whereas a property with a low cap rate is often well-managed, up to date and in a popular neighborhood with hardly any vacancies. As a general rule, a high cap rate signifies higher risk and a low cap rate signifies lower risk.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!


What is a Triple Net Lease?

A triple net lease, or NNN lease in real estate terms, is a type of commercial real estate agreement where the tenant assumes additional financial responsibilities as well as the predetermined rental rate on a commercial property. The different variations of net leases include single, double and triple net leases, which provide for a range of additional expenses covered by the tenant. Below is everything you need to know about triple net leases.  

What are the features of a triple net lease?

In a triple net lease, also known as a net-net-net (NNN) lease, the tenant is required to pay all of the costs associated with property leasing in addition to the agreed-upon rent. These costs include real estate taxes, building insurance and maintenance fees. To account for these accompanying expenses, rent on a triple net property is typically lower than in a standard agreement. Triple net leases are commonly used for longer rental periods, with initial terms beginning at 10 years or more.

What are the advantages of a triple net lease?

Triple net leases provide value for landlords and tenants, as the tradeoffs offer several different advantages for both parties. Due to the longer lease terms, landlords and investors enjoy the simple, consistent and predictable stream of income with infrequent concern regarding lease renewals or rent adjustments. Landlords also avoid maintenance and repair work, which again evades irregularities in the investment. Additionally, these leases tend to involve reliable, quality tenants that contribute to overall property value. The investors can also benefit from the sale and exchange of the NNN property by deferring taxes, using a 1031 Exchange.

The tenants or business operators reap the benefits of significantly lower rent in exchange for assuming the added management responsibilities. Furthermore, business owners may find value in the ability to sell their property to an investor mid-lease while remaining in business as a long-term tenant.

What are the considerations of a triple net lease?

While triple net leases offer many benefits, there are also several things to consider before signing a NNN agreement. Investors should be wary of inflation when setting long-term rental rates, as average returns may be insignificant with little to no rental increases over time. Also, to ensure a worthwhile investment, the experience, reliability and reputation of the tenant should be carefully evaluated. Finally, it’s important for tenants to remember that the additional property expenses may outweigh the lower rent depending on taxes, insurance, and maintenance costs encountered throughout the duration of the lease.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!


How to Use Cap Rate

To adequately analyze a commercial retail investment opportunity, investors often refer to the capitalization rate (cap rate) for efficient comparison. Utilizing the cap rate can be an effective method to evaluate commercial real estate as it measures the potential annual rate of return on a property.

What affects cap rate?

The cap rate is attained by dividing a commercial property’s net operating income (NOI) by the overall property price. The elements that factor into these two components can significantly affect the resulting percentage. On a macroeconomic level, supply and demand of real estate drastically affect property value and, thus, cap rate. On a microeconomic level, how business tenants operate, market themselves and make decisions can have a considerable influence on their ability to stay in business and remain reliable tenants, which affects NOI and cap rate. Other important factors that affect the cap rate of commercial retail property are the location, types of tenant leases, property type, interest rates and the overall national economic prosperity.

Measure of Risk

Both sellers and investors interpret cap rate as a percentage of risk. A low cap rate often signifies higher property value. From an investors standpoint, the potential returns on a property with a low cap rate are lower but, therefore, less risky. Commercial retail property with a high cap rate is indicative of a lower purchase price, but also a high NOI. A higher NOI increases the risk for investors as it depends heavily on the reliability of the tenants and the well-being of the economy. Additionally, sale prices can be manipulated to show more appealing cap rates.

How to Apply Cap Rate

Though landlords typically prefer lower cap rates for higher selling prices, investors prefer higher cap rates because they have a lower purchase price and higher possible returns. The way cap rate is applied and interpreted depends on the personal preference of the investor. Additionally, it’s imperative to remember that understanding the degree of risk in a commercial retail property investment is substantially more complex than merely identifying the cap rate. Several external factors can display a low cap rate one moment and a high cap rate the next.  

Due to these considerations, cap rates are best used to compare and contrast similar markets or properties. A cap rate can also serve as a practical leveraging tool in the decision to sell a commercial property. The valuable insight that cap rates provide can assist investors and landlords in their endeavors, but effective application of this information requires the help of a knowledgeable commercial retail investment brokerage.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!

 


Understanding Net Operating Income

With regards to commercial property investment, net operating income (NOI) is a critical concept for investors to comprehend. The formula includes several components that are often misread or misunderstood, however, understanding NOI is imperative to adequately gauge potential investment opportunities. Gain insight into the details of NOI to ensure a more thorough and accurate approach to your next commercial real estate investment endeavor.

What is NOI?

Net operating income is the total annual revenue produced by a commercial property after deducting operating expenses. A property’s NOI represents its ability to generate steady income and is utilized to determine the profitability and quality of potential investment. The NOI formula is comprised of several components but does not include income taxes and capital expenditures in addition to a few other minor expenses. Calculating NOI is performed using the following formula:

 Potential Rental Income

-Vacancy and Losses

     ———————————————

 Actual Rental Income

+Alternate Income

     ———————————————

 Gross Operating Income

-Operating Expenses

     ———————————————

Net Operating Income

Breaking down NOI

To calculate net operating income, it’s important for investors to understand the breakdown of each of the formula’s components. The potential rental income is the sum of the revenue that would be generated if the property was at capacity. Several different types of leases dictate rental income and subsequently affect this portion of the NOI formula, such as net leases, double net leases, triple net leases, gross leases, pass-through leases and percentage leases.

The vacancy and losses subtracted from the potential rental income include credit losses, missed payments and empty apartments or office spaces. This resulting number is called actual rental income.

The gross operating income is then comprised of the sum of the actual rental income and alternate income, which includes revenue obtained from parking, vending, laundry and other affiliated tenant services.

Once the gross operating income is determined, the final NOI number is generated by subtracting the property’s operating expenses. Operating expenses are any financial expenditures that are reasonably necessary to the function and operation of the commercial property. Commercial property operating expenses include fees, insurance, repairs, property taxes, utilities and other essential costs.

Excluded from NOI

NOI does not include capital expenditures, debt, depreciation, income taxes, leasing commissions and tenant improvements. However, some NOI calculations include different interpretations and versions of these additional expenses and, thus, thorough assessment is recommended.   

NOI Takeaway

Net operating income alone is a useful calculation of a commercial property’s current or potential profitability. NOI is used in several other commercial investment formulas, such as cap rate, which is a valuable tool to evaluate an investment opportunity and anticipate potential financial return rates. These formulas are crucial to investors looking into their next commercial real estate venture.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that emphasizes personal relationships. Contact us today to find your next investment!