Common real estate questions.
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Question sent in via email about commercial real estate
What does NNN mean? I keep seeing it come up in commercial listings I am viewing.
Response from Carlos sent via email,
The term NNN refers to “Triple Net” which is a term that is used when dealing with commercial leases. It is meant to identify an investment property as a Turnkey investment since the owner of the land and building leases the property to a user and that user signs a Triple Net lease which identifies that the tenant will pay for the costs associated with the occupancy of the building.
Each “Net” used in a lease use to refer to a certain cost associated with the operation of a building. But in the last 20 years commercial leases have become much more complicated since tenants have become more sophisticated in negotiating their leases. NNN leases use to mean that tenant paid his rent plus would pay the costs associated with the occupancy of building such as taxes, insurance, maintenance, repairs, janitorial, etc. Today we talk about triple net but each lease is different. Some landlords maintain the roof or outside shell and other leases the landlord maintains the maintenance and common grounds.
The ideal investment for many is something like ownership of a 7-11, Circle K, Jack in the Box, in which the tenant is the owner of the business or the franchisor who is actually the guarantor of the lease. We see some leases that are signed by the tenant who is a startup perhaps buying their first Circle K franchise, this may not be as good a tenant as the same lease signed by the Circle K corporation. The point is that this is a whole additional point of consideration to take into account when looking at a NNN investment deal.
The first question for clients is how much are they willing to invest? Typically the minimum NNN deal is going to be at least $1+ million. This buys a site that includes lot and building and is leased to a tenant that is the operator with good history and credit.
The 2nd question is what kind of return is he expecting; I have seen too many investors that expect that they should get 7-9% cap rate and you are not going to find it, at least not in California. The rate of return on deals in California for small NNN deals is likely to be 4-6%,
3rd question; is investor willing to consider areas outside of California, there are some states that offer better returns and many investors don’t mind buying buildings in other parts of the country since they have few management issues to deal with.
4th question; do you have cash? Not likely that these deals will make any sense if the investor is going to also pay a mortgage.
Hope that helps, please feel free to respond with additional questions and if you need representation for anything related to commercial real estate please let me know.