NNN Properties are typically free standing buildings that are leased to tenants for a 10 to 25 year term. NNN Properties offer the advantage of little or no management responsibilities as the tenant pays for all, if not most of the expenses. The investor collects their rent with little to no other involvement.
Tenants in NNN Properties are divided by both quality and type of businesses they are in. Qualitatively NNN Properties have either credit or non credit tenants. The most desirable (least risk) NNN Properties have investment grade (rated BBB- and better) credit tenants.
Non credit tenant NNN Properties have tenants that are not credit rated. These tenants are often regional or local businesses or companies that are unrated. Some tenants are considered credit worthy yet are unrated because they carry no debt on their books.
Who Purchases NNN Properties?
NNN Properties are appealing to those who wish to have absolute ownership of their commercial real estate investments and have little to no management responsibility. The alternative ways of owning non-management commercial real estate would be to own a security in the form of a REIT or mutual fund or invest in fractional ownership Tenant in Common properties.
A major benefit of 100% direct ownership is control and the ability to defer future capital gains by doing a 1031 exchange when the property is sold. For numerous investors the lack of immediate liquidity inherent in NNN Properties is offset by the lack of volatility NNN Properties offer when compared to a securitized investment. Investors should carefully consider their need for liquidity when considering investing in NNN Properties.
How are NNN Properties Valued?
NNN Properties are usually valued using their Capitalization Rate also referred to as Cap Rate. NNN Properties cap rates reflects the value of a stream of economic benefits discounted for time and risk. Generally this is computed as a pretax cap rate using the Net Operating Income (NOI) for NNN Properties.
NOI is income less all expenses before debt service. The Cap Rate is the NOI divided by the purchase price for NNN Properties. Conversely the NOI divided by the Cap Rate will equal the purchase or selling price.
Example of Cap Rates for NNN Properties:
NOI = $100,000/10%=$1,000,000 Purchase or Selling Price NOI = $100,000/$1,000,000=10% Cap Rate
How are Cap Rates Determined for NNN Properties?
Some of the major considerations when calculating Cap Rates for NNN Properties are:
The credit worthiness of the tenant.
The length of the lease, typically 10 to 25 years.