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Mitigating Operating Expenses Through Triple-Net, NNN, Properties

One of the chief components of any successful real estate investment is the ability to accurately forecast and control both operating and carrying costs. Depending on the type of property an owner controls, operating costs can vary greatly due to the cyclical nature of demand for real estate. Operators faced with rising vacancies and lease-up costs can find their profit margins squeezed and therefore fail to meet their investment objectives. In contrast to the varying costs of owning and operating multi-tenant properties, investors can mitigate operating and carrying costs by investing in single-tenant, triple-net leased real estate.

An owner of a multi-tenant property is faced with a slew of varying costs, many of which can occur unexpectedly. Most landlords pass operating costs, such as real estate taxes and building maintenance, on to their tenants, proportionate with their share of space. As long as the tenant remains, the landlord is relieved of these expenses and will maintain expected revenue. However, if a tenant vacates the space, either due to closure or failure of their business and does not fulfill their lease obligation, the owner is then faced with paying these expenses. Depending on the current market for rental space, an owner may experience a long period before finding a new tenant. During this time, the owner is left not only without rental income, but also experiences added costs resulting in a cash outflow. In order to re-lease the space, owners are often obligated to pay for a build-out to suit a new client, in addition to paying brokerage fees. The largest cost building owners face, and the most unexpected, is structural failure or a need for extraordinary building maintenance. All of theses expenses lower profit and, in extreme circumstances, can lead to negative profitability. The reality of multi-tenant properties shows that owners cannot expect to maintain structured and consistent revenue.

An alternative to the fluctuating revenue experienced with multi-tenant properties is an investment in single-tenant triple-net leased buildings. Triple-net, also written NNN, leases obligate the tenant to pay, in addition to rent, all insurance premiums, real estate taxes, and building maintenance. Thus, the revenue to the owner is net, net, net of all operating costs. The obligation of the tenant to pay all building maintenance relieves the owner of all common building upkeep as well as any structural maintenance or repairs. NNN leases are usually long-term, 10 years or longer, sometimes with multiple options to renew. In addition, NNN leases are usually backed by a corporation associated with the tenant. Due to the structure of these leases, the main risk is the solvency of the guarantor; regardless of the particular location's profitability, the guarantor is obligated to fulfill the lease even if that particular location closes. This structure mitigates an owner's risk and the added costs of a vacancy. Since triple-net leased properties have much lower or no operating costs, cash flows from these investments are far more structured and consistent.

For investors looking to receive consistent and accurately forecasted revenue, single-tenant triple-net leased properties offer a significant advantage over multi-tenant and other types of real estate assets. Due to the low variance and structure of their cash flows, NNN properties are a crucial and comfortable component of a well-diversified real estate portfolio.

-Written by Sean Shanahan, Chief Financial Officer | Iridium Capital | sshanahan@IridiumCapLLC.com | visit our website

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Introduction to Net Leases

Within commercial real estate there are varying forms of leases that define, among other terms, the division of costs between the landlord and tenant. In most leases, the base rent includes the tenant's proportionate share of real estate tax increases above a certain base year as well as common building maintenance, known as CAM charges. These provisions increase the rent paid by tenants, but leave the owner responsible for actually maintaining and operating the property. One form of lease, known as a net lease, completely relieves the building owner of certain or all operating expenses.

Net leases, in contrast to normal leases, obligate the tenant to directly pay for operating costs in addition to rent. This form of lease comes in four types which obligate the tenant, in varying degrees, to pay more of the operating costs. As a concession for bearing these costs, a net lease usually has a lower base rent than traditional leases.

A single-net lease obligates the tenant to pay all real estate taxes, not just the tax increase over a specified base year. This type of lease relieves the owner from having to experience varying costs due to tax increases.

A double-net, or NN, lease obligates the tenant to pay for real estate taxes and building insurance. This leaves the owner responsible for all building maintenance, most notably the roof and structure. Although maintenance can vary in cost, usually due to the age and type of building, owners usually experience lower variance in cash flows because of the tenant's obligation to pay both real estate taxes and insurance, including any increases in either.

A triple-net, or NNN, lease relieves the owner of all operating expenses; the tenant is responsible for all real estate taxes, insurance, and building maintenance. This type of property is usually purchased by investors who are looking to receive a structured cash flow that is unobstructed by the operating costs associated with other types of leases and property. NNN is the most common form of net lease.

An absolute NNN lease is the strongest of all net leases. In addition to it being a NNN lease, the tenant also takes on nearly all real estate risk including rebuilding of the structure in the event of a catastrophe. These leases are usually only created with strong national credit tenants who are able to bear the added risk. This lease acts similar to a bond in that the owner receives continual rental income net of any expenses, regardless of the usability of the property. These types of leases are rare, can have terms of 30 or more years, and offer the lowest risk of any net-lease.

-Written by Sean Shanahan, Chief Financial Officer | Iridium Capital| sshanahan@IridiumCapLLC.com | visit our website

How to Own a NNN Property

There are many ways to invest in NNN Properties. An investor can purchase a property outright, which usually requires a large capital investment. This form of ownership gives the owner complete control over his investment and responsibility for the tenant's adherence to all lease terms. Investors can also invest in real estate funds which purchase NNN Properties. These funds pool resources from many investors to create a diversified portfolio of NNN properties. The funds also attend to all aspects of property and fund management, allowing the investor a passive investment.
What is a Real Estate Fund? A real estate investment fund is a pool of private capital used to purchase real property. Each fund has defined goals and objectives for investments and may invest in a wide variety of different real estate products. Funds vary in their degree of risk based on their types of assets. Funds tend to lower risk by investing in a diversified portfolio of assets. Each fund sets its own fees for management including creation fees, management fees, and incentives, all of which lower investors' returns. Funds allow investors the ability to invest in commercial property with a much lower capital contribution.
Info@IridiumCapLLC.com | visit our website

NNN Property Report of 2009

There is a report that we highly recommend reading titled Net Lease Single-Tenant Retail Report: Fall 2009, written by Andrew Fallon, on net leased property in today's market. The comprehensive report details all of the most recent market trends and data available for the retail net leased property industry. Let this be another source of education about NNN Leases and Real Estate Funds. Triple-net leases are a smart investment to consider with current market trends showing CAP Rates growing to 7.75% – 8.75% in the retail Sale-Leaseback market. The article concludes, "Concern about rising vacancy levels and falling rents promote the appeal of single-tenant net lease investment sales. Additional market uncertainty could influence investors to consider more long term wealth preservation strategies. The volatility of Wall Street continues to worry investors who might start avoiding stocks and bonds, and begin evaluating core real estate investments." You can find it online: http://calkain.com/reports/NetLeaseSingleTenantRetailReport-Fall2009.pdf

For investment options please email us: info@IridiumCapLLC.com or visit our website

What is a NNN, or Triple Net, Lease Property?

A NNN Property is an income-producing property which provides rental revenue to the owner Net of all expenses. The tenant is obligated to pay all taxes, insurance, and building maintenance costs, as well as rent. Thus the annual income derived from the property is Net Net Net of all operating costs.
Characteristics: There are several key factors to consider when evaluating a NNN property. The most important is the lease term. While NNN lease terms range from 1 to 50 years or more, a prudent term is one that allows the purchaser to recoup most, if not all, of their acquisition costs through rental income. Since most leases contain pre-established rent escalations, higher rental income is obtained in the latter years of the lease. A reasonable holding period permits multiple rental escalations over the term of the lease. Many NNN leases are signed for 15-20 years and may have multiple 5-year renewal options. To protect the owner of NNN leases from tenant default, it is imperative that the leases include a corporate guarantee, making the corporation liable for rent throughout the term of the lease.

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Triple Net (NNN) Property Investing

Investors looking to diversify their portfolios and elevate returns have historically turned to real property as an alternative to cash, bonds, commodities, and precious metals. Recently, many investors hit the pause button when it came to their investment plans, due to either a risk-averse philosophy, the lack of a trusted adviser, or the seemingly steep cost of real property investing.
However, these is a strong alternative for real estate investing that provides ongoing revenue and reliable safeguards. For a meaningful and affordable investment, NNN properties offer unique opportunities for high returns at relatively low risk.
There are many ways to invest in NNN properties. An investor can purchase a property outright, which usually requires a large capital investment. This form of ownership gives the owner complete control over his investment and responsibility for the tenant's adherence to all lease terms. Investors can also invest in real estate funds which purchase NNN properties. These funds pool resources from many investors to create a diversified portfolio of NNN properties. The funds also attend to all aspects of property and fund management, allowing the investor a passive investment.

For More Info please email us: info@IridiumCapLLC.com or visit our website