INVESTOR GUIDE FOR DUE DILIGENCE FOR POTENTIAL TRIPLE NET LEASE INVESTMENT

Triple Net Properties can be a great investment for both sophisticated real estate investors and people who are new to the real estate investment world. Due diligence is the process to verify whether the deal you cut when you made your offer is the deal you are actually getting when you close on the property. 

Regardless of your experience level, when looking to purchase a Triple Net Property, there are a number of factors to consider. In this article, we cover the due diligence for potential Triple Net Lease Investment.

 

The Creditworthiness of the Tenant

The creditworthiness of the tenant is one of the most important due diligence factors when considering whether to purchase a Triple Net Property. When purchasing a Triple Net Property, you are generally purchasing the property for the steam of income generated by the rent under the lease. 

A creditworthy tenant is more likely to make timely rent payments, ensuring the Property has a constant payment stream. Regardless of the tenant, it is important that the letter of intent and purchase and sale agreement for the property include a requirement that the seller provides an operating statement for the Property and any financial statements or other financial information of the tenant that the seller may have in its possession.

 

Location of the Property and the Form of Building

While the creditworthiness of the tenant may be the most important financial consideration of a Triple Net Property, the location of the property and form of the actual building may be the most important long-term consideration because tenants come and go. The Triple Net Property needs to be attractive to other tenants in the event your tenant ceases operation on the property or the lease terminates.  

It is important to find a Triple Net Property that is in a location with easy street access and is clearly visible to those driving by it. It is also important to consider the form and make-up of the building on the property. If the building is fairly specialized it is going to be more difficult and more expensive to lease it once the current tenant leaves.

 

Term of the Lease

In the short term, you are buying the Triple Net Property for the income stream generated by the rent from the lease. If the remaining term of the lease is short, your income stream will be short as well. Re-leasing the property is also expensive. If the lease term is short, not only will you have a reduced income stream, but you’ll be required to expend more funds to re-lease the property once the term ends. 

In order to avoid this situation, consider buying a Triple Net Property with a longer remaining lease term (approximately ten (10) years or more). However, if you like the Triple Net Property as a long-term investment and the lease has a short remaining term, consider requesting a price reduction from the seller to offset some of the costs associated with re-leasing the property.

 

Understanding Cap Rates

If you are not familiar with the CAP rate or Capitalization rate it is the ratio between the net operating income produced by an asset and its capital cost (the original price paid to buy the asset) or alternatively its current market value. This is essentially one of the main calculations you will be seeing as you look at different net lease opportunities. To get to the cap rate on a deal you will need the annual net operating income, the rent, and the cost of the deal.

Cap Rate = Annual Net Operating Income (Tenant Rent) / Cost (Asking Price)

 

Loan Assumption

Another option for an investor is a loan assumption, which there are many of these types of deals out there. This allows a qualified buyer to assume the loan of a seller and own an asset without having to get a brand new loan. Typically with net lease financing, they are structured with long terms and some with hefty prepayment penalties

 

Engage Legal Counsel

When purchasing a Triple Net Property, you need to be sure that you have sufficient protections under your purchase and sale agreement, you are receiving good title to the property, the property complies with all applicable laws, and there are no environmental issues affecting the property.  Purchasing a Triple Net Property with any defects to these items can destroy the value of your investment. It is important to engage a commercial real estate lawyer to review or draft the purchase and sale agreement and review the title, survey, and other due diligence. Your lawyer will also be able to guide you through any potential pitfalls that may arise during the purchase process.

 

CONCLUSION

Due diligence is an essential and vital investigative procedure that ensures your potential NNN property investment is successful and hitch-free. As with any other investment, you have to exert effort and time to study how the Triple Net ‘NNN’ lease property agreements work before deciding whether it’s for you. Once you’ve decided to make this investment, make sure that the transaction is legitimate to avoid problems down the road. Moreover, any investment has accompanying risks, however, it can also be a lucrative investment if done correctly.

 

 

As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.