In today`s commercial real estate industry, one of the most discussed topics may be the advantages or disadvantages of owning and managing triple-net, or NNN properties. A triple-net property is a single tenant retail property that is typically leased to tenants who have extremely high ratings. These high ratings, in fact, account for the "net, net, net" or "triple-net" designation.
A triple-net property may look like a win/win situation. After all, these properties are generally new or in new condition. The tenant takes over the management responsibilities on a long-term lease and thanks to the triple-net status of the tenant, you can be assured of a continuous cash flow that you can depend upon. There are, however, a few facts you`ll want to consider before investing in a triple-net property deal.
With a triple-net property, you`re going to pay for convenience. After all, you`ll have that magical combination â€“ a reliable tenant and a perfect property that doesn`t need any maintenance, but these advantages don`t come cheap. If you have a tenant with a high credit rating, you can expect to pay approximately a six percent cap rate, which is the percentage of return on the investment.
Conversely, if you had a property that required more maintenance, you would actually get higher immediate returns, although you`d undoubtedly get more headaches as well. For most investors, it`s well worth it to accept this type of compromise in order to have a hassle-free property leased by a reliable, worry-free tenant.
No matter what type of property you`re investing in, there`s always a risk, even with triple-net properties. Contrary to what investors may think, credit ratings don`t always tell the whole story. This is due to the fact that company credit ratings are determined by three different rating firms: Moody`s, Standard and Poor`s and Fitch. Although these firms are consistent with one another in their ratings, it`s important to realize that they consider any company with a BBB- rating or higher as an investment grade company.
As an example of grading, Wal-Mart is considered AA/Stable, as is Home Depot. If you`re lucky enough to get a tenant with an AA rating, you probably won`t have to worry too much. Nevertheless, a BBB- rating, while far below AA, is still considered investment-worthy for a tenant.
When it comes to default rates, the numbers tell the story. An AA company tends to have a 1.31 percent default rate, while a BBB tenant can have as much as a 6.64 percent default rate, which isn`t really that high compared to the lower-grade/higher-risk tenants you would get with other types of leases. For example, a B tenant may have a default rate of 35.76 percent, while a CCC tenant may have a default rate of 54.38 percent.
Given these numbers, you can clearly see the advantages of a triple-net property investment. Leasing to a client with an excellent rating may bring lower immediate returns, but it`s arguably the best long-term type of investment you can possibly make.
Whether you`re considering your financial planning options or whether you`re trying to decide on whether or not a triple-net property investment is right for you, it`s crucial that you do your homework before making your final decision. Once you`ve learned about the advantages of triple-net leases, you`ll be able to rest assured that you`ve made the right decision for your financial future.
To learn more about single tenant financing and commercial loans, please visit http://citycapitalfinance.com or call us at 310-598-5939