For investors seeking an attractive yield and diversification benefits within their portfolios, triple-net leased (NNN) real estate investments may present an opportunity. NNNs tend to have a relatively stable yield and returns relative to the risk level assumed.
WHAT IS A TRIPLE-NET LEASE?
An NNN refers to a type of lease in which the tenant is responsible for property-level maintenance, insurance and taxes, in addition to rent. Typically, NNN properties are freestanding, single-tenant commercial properties, such as quick-service restaurants, drugstores, hotels, medical office buildings, bank branches and manufacturing and distribution facilities.
NNN investments are guaranteed by the tenant. Ideal NNN tenants exhibit strong rent coverage and may themselves be credit-rated entities.
NNN lease agreements tend to be relatively long in duration (often 10 to 20 years), and frequently feature contractual rent increases, which positively impact future cash flows. Another key feature of NNN investments is their ability to generate liquidity via refinancing or outright sale. Commercial lenders, moreover, may be more willing to refinance or provide loans to investors planning to purchase NNN investment properties because of these properties’ high-demand locations, long lease terms and tenant creditworthiness.
Finally, barriers to entry such as knowledge and capital, leave the NNN investment market highly fragmented, and with few large players. This fragmentation allows smaller, insightful investors the opportunity to participatein the NNN marketplace.
HOW DO YOU VALUE TRIPLE-NET LEASES?
NNN investments differ from traditional real estate investments, as the value of traditional real estate is determined entirely by the real estate itself. In contrast, the value of an NNN investment property is determined through a number of factors, including: the rent payment, the tenant’s credit, the lease length, contractual rent increases and the physical real estate. These key components should be considered and evaluated if you are looking to invest in NNN real estate.
ACCESSING TRIPLE-NET LEASED INVESTMENTS
An individual investor may not have the time or resources necessary to invest in individual NNN properties. So a simplified, risk-adjusted and cost-effective way to access this asset class is through a real estate investment trust (REIT). A REIT is a vehicle that owns and operates income-producing commercial and/or residential real estate and provides investors an opportunity to invest in a portfolio of income-producing real estate through a single investment.
Since REITs may own multiple properties, tenants can be diversified across many different business sectors and geographic locations and have varied lease terms, allowing investors a greater level of risk mitigation. However, investors should be aware that some REITs and mutual funds have high management fees and may have complicated tax reporting.
Historically, NNN properties have performed well, regardless of economic or financial conditions.
The ability for investors to select locations and tenant types allows for diversification and risk mitigation, even in the most tumultuous of times.
Additionally, creditworthy tenants and long-term lease agreements may lead to extended stability in a fluctuating marketplace.