If you’re searching for optimal real estate investments, it is valuable to have an understanding of what financing a triple net lease property entails.
Funding a triple net lease property, or else called NNN financing, is especially a rewarding option in regards to commercial properties for lease. NNN properties in the market are occupied by a single renter who is responsible for expenses beyond base rent. Additional responsibilities of the single-tenant include some or all of the real estate taxes, maintenance, and building insurance.
This type of lease has gains and shortcomings for the investor and tenant. We will take a glance at the basics of triple net or NNN financing and why it is significant for your endeavors before we dive into financing them.
A Net Lease?
Prior to understanding financing NNN properties, it is fundamental to look at what makes a net lease. In the fashion of marketable real estate, a net lease has the tenant take on the weight of a portion or whole of the standard rental and upkeep expense of the property. They might pay a portion of the repairs, taxes, or other costs plus base rent.
For example, there are many different types of property to consider when looking at options for financing. For a single-tenant lease financing, the tenant would pay property taxes. In a double net or NN lease, the renter would pay property taxes as well as insurance. That leaves the triple net, or NNN financing to pass on the majority level of expenses to the tenant.
How NNN Financing Works
When a triple net marketable lease property is offered, the lessee is responsible for property taxes, property maintenance, and repair, insurance, in addition to standard rent and utilities. This saves the property owner a large sum of cash thanks to the tenant’s responsibility that nearly equals those of the owner.
A general benefit for the tenant is that rental costs would be lower than they normally would be in other situations. Basically, the property owner gives transfers their reserves in the shape of a lower leasing charge. These leases are favorites for business operators for several reasons:
- The standard lease is 10 to 15 years, sometimes even 25 years.
- Rental inflation is controlled, allowing for a long-duration lease.
Triple net buildings also hold a large scope of advantages for investors:
- Investors enter consistent proceeds over a long-duration contract.
- At a few, to zero expense for the lessor, the building in question will seemingly accumulate in worth.
- Investors do not need to worry about management issues.
- Vacancies are not a concern.
- Property renovation expenses are zero, or near to nil.
- For the sale of a NNN lease investment building, capital may be transferred over into a 1031 exchange to redeem the investor’s costs on tax reprieve.
High Gains, Low Risks
We want to help you find a property deal that bears low risks and gives you a high return, but it doesn’t get much better than a NNN property. As we mentioned before, leases range from 10 to 25 years, giving you stability in these properties. Triple net properties are also governed by one set of agreements, meaning that you don’t have to worry about fluctuations in rent, renovations, or any other expense.
Single Tenant, Simple Management
You are only renting to a single tenant with a NNN property, and the tenant will be taking all of the expenses of maintaining the building. This leaves you with a hands-off approach as a landlord. You will only need to step in for urgent matters, such as a renter failing to meet their agreement.
Passive Income
Through your lease property, reap a passive income with zero surprises and few stresses. You will not be troubled with compensating insurance, taxes, upkeep, maintenance, and repairs. All of these concerns fall on your tenant. You can call it easy money, although there is no such thing of course.
Mortgage and Financing
The ultimate aim for any type of lease property is to receive a return for costs related to the financing and mortgage of the building. A triple net lease is preferred for that purpose. Finding a credible NNN financing advisor offers you a number of diverse options for financing that supports your efforts, with a lease agreement that will help you pay off your costs immediately.
Credit Or Non-Credit?
For tenants with an investment-grade rating of BBB or more, or large publicly traded companies, you will have a low risk on the property you buy. Yet, you will likely have to pay much more for the purchase and may get a much lower ROI after the sale.
However, small, independent businesses such as a privately owned restaurant or shop is a higher risk due to their financial instability. Despite the higher risk, you will likely find the property at a lower price and receive a larger ROI on your investment.
Lease Agreements
In regards to any net lease real estate, you’re nearly always acquiring a building that already has a tenant. That means the building has a lease agreement attached. You need to understand how the attached agreement works. Review the renewal options and the remaining terms on the lease that the renter may have. The terms of that lease will directly affect your loan.
A good way to approach this is to understand that, for the most part, the remaining years will act as the base for what the lender will offer. If five years a remaining on the current NNN property, then your loan term will most likely also be five years. Following this understanding, you can assume a 10-year loan if there are 10 years remaining. Lenders usually offer loan terms from five to 10 years.
Who Are Your Lenders?
Lenders for financing NNN property deals will typically be a private lender, or a federally insured bank or credit union. The most preferred loan options typically derive from federally insured institutions. These institutions will generally offer the best dynamic rates and the most preferred terms.
On the other hand, private lenders are nearly always more costly. If time is not on your side and of the essence, then private lenders are great temporary solutions for NNN loan financing. With a private bridge loan, you can have the necessary time to negotiate a long-term lease. Or you can seek more favorable NNN financing options from a credit union or bank.
Who Are Your Tenants?
At the end of the day, no matter the institution you decide on, the most significant factor to consider is your tenant’s credit rating. If your tenant has a high credit rating, your lease terms will benefit tremendously. That is predominantly due to the fact that the lender is mindful that you will be dependent on the tenant’s credibility to pay them back. In other words, your tenant’s ability to pay rent and fees directly affects your ability to responsibly uphold your agreement.
A tenant with poor credit is a sign that the sale is a high risk, therefore searching for NNN tenants with good credit is key.
Other Lease Types
Aside from the previously mentioned net leasing financing options, there are two others to mention. Percentage and full service or gross leases are very different from net leasing.
Percentage Lease – Here, the renter makes an agreement to pay standard rent and operational costs. In addition, there is a variable cost that varies monthly and is directly tied to the lessee’s monthly sales.
Full Service/Gross – In this lease, the lessee agrees to pay a yearly fee. This fee holds an appraise determined by the landlord in regards to what the operational expenses might be for the duration of the lease.
Hasanov Capital Is Here For You
In this article, we covered everything there is to know about NNN financing. Yet, that by no means indicates a simple process from here or even a full understanding of what net financing entails. There is still plenty to do in terms of deciding what marketable property is right for you, in extension to finding the best lenders and the most reliable tenants.
That is why Hasanov Capital is dedicated to being your credible source of financing information and advice. We have veteran advisors and a reputable team that can match you with the best investment. If there are risks, we can help you avoid or minimize them.
Hasanov Capital works with more than one hundred top financial institutions and private lenders nationwide. We identify the most favorable loans for you. We compare loan products quickly and point out lending solutions you may not have considered.
If you are seeking expert advice and want to learn more, you can start an application or contact us today.
