Commercial real estate requires a tenant to pay a net lease in addition to paying rent. These are expenses that would otherwise get paid by the landlord. The expenses are referred as NN lease, NNN lease or ground lease. The tenants are given a written lease indicating the items that are to be paid. This guide will provide all you need to know about net leased investment.
The first step is identifying the person who will guarantee the lease. Most people prefer corporate followed by franchisee guarantees. Individuals are the most risky guarantees. The lease structure and terms are of importance. If a tenant is the same, then a 20 year lease is much preferable than a five year one. Take note of the available options that the tenant has. If the end of the lease is approaching and there are no available options, then you will have to negotiate the lease in case the tenant says they want to stay. To avoid this, many people prefer longer options with long base terms.
Secondly, the location of the property will determine if it is re-leasable in case the tenant leaves. Majority of tenants usually pay way above the market rate in order to get the best locations. It is easier to re-lease a fast food restaurant compared to distribution facilities which are often large space. If a tenant makes payments way below the market rent, it is easier to replace the rent in case they vacate.
It is also important to know your exit strategy for net leased investment. You have to develop a strategy that you are sure will give you cash in the long run. You also need to have an exit strategy by having an idea of your hold period. Get to know the resale value for your investment. If your business idea is pleasing to the investors, it will add more buyers to your list in case you decide to sell the property. This is why research is important before getting into net leased investments.
It is important to know about rent escalations. if so, get to know by what percentage and at what frequency. There are certain rental categories that offer high rent escalation compared to others. In normal cases fast food leases increase biannually, annually or over a long period while drug stores don’t get rent escalations. It is wise to view the credit rating of tenants. This will give you a sense of stability. The good news is that there are companies that offer tips on finding the right property for net leased investment. This is why you have to consult and research before getting involved in net leased investment.