NNN lease

Though NNN leased investments are considered to be highly risk-averse investments, especially when leased to a national credit tenant, the landlord is still exposed to some financial risk. In the fine print of most NNN leases these risks are specified. For instance, who carries the obligation to rebuild after a casualty (natural disasters included) or whether the tenant must continue paying rent should the property be condemned? In other instances, certain risks (e.g. fluctuations in property taxes) cannot be completely accounted for in the initial contract, forcing the landlord to estimate these costs early on. In this scenario, if the landlord's accountant does not follow through with changing the invoices appropriately, it may cost the landlord thousands of dollars by the end of the taxable year. Although NNN lease investments carry relatively low risk, they require high levels of oversight for these reasons.[7]

In one variation of a NNN lease contract, the "bondable NNN lease" (sometimes referred to as a "true triple net" or "absolute triple net" lease), the tenant cannot terminate the lease or seek any rent abatements under any circumstances, a provision that mitigates some of the risk for the landlord.[8]

A "bondable NNN lease", the most extreme form of a NNN lease investment, is often used incorrectly in the net lease industry when referring to NNN properties which are merely occupied by investment-grade tenants. The tenant's credit rating is a crucial factor which the lender takes into account in their decision to lend on a property and under what terms; however, it is not the characteristic which distinguishes a bondable triple net from a standard triple net lease investment. When evaluating the value of the credit tenant's credit, most brokers, and lenders, base their analysis on the credit rating garnered by one of the major credit agencies (Moody's, Standard & Poor's, Dun & Bradstreet). Though these ratings are important, they don't always paint the most accurate picture of a company's overall performance and future viability. Some brokers offer the services of an in-house stockbroker and analyze the credit tenant's financials and stock performance when the tenant is publicly traded on an exchange. A great deal can be learned by examining the credit tenant's stock performance in comparison to other industry competitors. Other readily available metrics such as the P/E ratio, PEG ratio, and debt-to-equity ratio can be indicators of a credit tenant's financial health.

The value of a net leased investment is determined by the value of the real estate, the value of the credit tenant, and the value of the lease itself.

1. In a standard NNN leased investment the landlord owns the land and building while collecting rent from the tenant. If the tenant chooses to leave or the landlord decides he or she wants a different tenant when the lease term is up, he or she still owns the building and land. Planned developments in the area as well as current and future demographic trends all affect the real estate's value. The value of the physical building should also be factored in when determining the real estate's value.
2. The second determinant of value is the quality of the credit tenant. This is generally determined by the tenant's current credit rating and past financial reports. Most investors use the Standard and Poor's credit ratings. In order to qualify as an investment grade tenant, the company must be rated at lease BBB- by Standard and Poor's. Properties leased by credit tenants are in the highest demand and therefore command a lower capitalization rate than non-investment grade tenants.[11]
3. The third determinant of value is the lease itself. NNN leases are more valuable than NN leases because the landlord is responsible for some of the expenses in a double net lease. The length of the lease is also a determinant of value (20 years of guaranteed income will be worth more than say 10 or 15 year terms). Generous rental increases, also known as rent bumps, add value to the lease and protect the landlord against inflation. Some leases also have a percentage rent kick in if the tenant's gross sales hits a certain CAP. Most leases grant the tenant options to renew (several short term options put the landlord in a weaker position when it comes time to renew the lease). If the current rents called for in the lease are below market, the landlord has the opportunity to command higher rents when the lease term is up.

NNN lease planning is a rich investment tool which provides the investor with many opportunities to navigate an ever-changing market. NNN lease investments are essentially inflation-protected bonds guaranteed by a credit tenant, rather than a state or local municipality. The tenant makes monthly payments to the landlord, while the real estate (and often rent bumps called for in the lease) provides the investor protection against inflation. . NNN lease investments provide similar tax advantages as tax-exempt municipal bonds, without forcing the investor to settle for lower yields or opening the investor up to a large capital gains hit.[12] If an investor were to purchase a bond in the secondary market and turn around and sell it for a profit years later, he or she would have to pay a capital gains tax on the profit, regardless of whether or not the bond is exempt from state income tax. This is not the case when investing in NNN leases because, although structured like a bond, they are still considered real estate investments and therefore can be depreciated in the same manner as similar income producing commercial real estate. The taxes on the income they generate can be written off or deferred over the life of the asset. The investor, of course, has to pay depreciation back when he or she sells, however, this too can be circumvented by evoking a 1031 exchange and trading into another like-kind property.[13][14] NNN leased investments are also financeable allowing the investor to leverage the credit of their tenant and the interest payments would also be a write-off. .[15]