Annette Cooper/NNN

NNN Lease Investing

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STRETCHING YOUR RETIREMENT DOLLAR

It’s no secret that prudent investors have discovered the income potential of purchasing property out of their immediate area.

Quick, inexpensive airline flights and easy internet access make

it convenient to participate in this relatively new and lucrative investment opportunity.

One “management free” option for enhancing your retirement income is a Triple Net Leased Investment. A Triple Net Leased Investment (NNN) is typically a commercial property occupied by

an established tenant with a long-term lease that obligates that tenant to pay all the expenses of occupying the property (real estate taxes, insurance, and all the common area maintenance). When you purchase the real estate, you also purchase the lease and the underlying income stream. A typical tenant for this investment category can be a drug store (Walgreen’s), restaurant (sit down or fast food), a gas station, a bank, an industrial distribution center, or a large grocery store (Safeway).

To explore this investment alternative, consider the following criteria before making your decision. Here are some prudent guidelines:

1) TENANT CLASS: Who is the tenant behind the lease? Who is the guarantor? If you require ultimate security from your investment; be prepared to sacrifice a little on the return. A good example of this would be buying real estate leased to Walgreen’s. Walgreen’s has stellar credit, offers supreme safety, but the return is usually a little under the rest of the market.

For a more aggressive bottom line, you may want to consider real estate occupied by an established franchisee. An established franchisee operates hundreds of locations and will have an impeccable management résumé. More important, the return from a franchisee may be 2% more than the return from the Walgreen’s investment. They can be extremely reliable, but they’re

not Walgreen’s. Still, the accelerated income is often worth the trade-off.

2) LEASE TERM: I’m almost always comfortable with the longest term I can find. A long term lease gives the buyer the comfort that the tenant believes in this location. The investor has a very saleable product should they decide to trade up or want to liquidate in the years to come come.

3) LEASE BUMPS (Increased lease rate over time):

Most long term leases will not have “annual” increases, but there should be a provision for rental increases every 3 to 5 years. This will create another appreciation hedge besides market forces. (Interesting to note that the majority of Walgreen’s leases have NO provision for rental increases; another trade-off for that security.)

4) LOCATION: Typically, the better the location, the lower the return. But what’s a good location? This gets interesting when you research geographic areas in the country and examine where growth is occurring. The ability to quickly research information has opened up investment opportunities that just weren’t accessible before the internet and it has created a dynamic pool of investor opportunities. It’s exciting, lucrative, and worthwhile to become familiar with this investment strategy.

5) KNOW THE LEASE DOCUMENT: A careful review of the actual lease document is critical to your success. KNOW WHAT YOU’RE BUYING! When an NNN leased investment is purchased, consider it a bond with a real estate component that will give you real estate tax advantages and appreciation (without the management headaches). The lease should be reviewed by a

real estate attorney and the real estate broker representing you.

Both professionals will examine it from a different vantage point.

It will help you accumulate all the information you need to make an informed, intelligent decision.

As they say: You’ve worked hard for your money. Now let your money work hard for you.

Paul Krugman wrote a sobering commentary regarding the shakeup in the financial world, and its impact on liquidity and market holdings. It reminded me of a strategy presented by one of my clients recently to convert stock market bond holdings into NNN leased investments. An NNN leased investment is a real estate investment that includes a long term lease

with an established tenant where the tenant

is obligated to pay all of the expenses that go along with owning property. The NNN refers specifically to taxes, insurance and common area maintenance.

The advantages can be substantial. The investor receives the same income (or more depending on the appetite for risk) in income stream. The advantage of a new depreciation schedule becomes a significant tax benefit not available with bond holdings. Best of all, you own the real estate.

In addition, the investor has the option to increase buying power by creating leverage should they decide to get financing on an investment opportunity. This will in turn create another tax advantage because of the opportunity to write off all the interest, as well effortlessly increase equity by paying down the note with the income stream generated from the income from the leased investment.

What are the risks to converting bonds to NNN leased investments? The most obvious will be the interruption of absolute liquidity should a life situation arise that would require immediate cash. The other risk would be in the unlikely event that the tenant went bankrupt and the investor would have to sell the building, or re-tenant the property. If the need for “instant cash” arose, the investor would have to endure the delay necessary to sell or refinance the property—depending on the circumstances.

The advent of a defaulting tenant can be significantly averted by paying substantial attention to the tenant credit rating, and the real estate quality at the time of purchase. Quality NNN investments typically have seasoned intrinsics because the tenant has chosen this location after extensive demographic research into perspective sites that will generate sales for that operation.

A typical tenant for a NNN leased investment is interested in developing new unit locations to generate sales of their widgets and does not want to have to develop resources tied up in real estate equity. Walgreen’s is a good example of a company interested in high quality real estate to occupy, but not own.

It gives them the ability to keep cash in order to open new income generating stores

and make money.

It’s important to remember that all situations, even those that appear perilous, contain within them opportunities. Sometimes it just takes a bit of bold action and agility to move forward taking advantage of the new market forces.

As the old saying goes; Don’t wait to buy real estate; Buy real estate and wait.

ACQUISITION STRATEGIES FOR NNN TRADE PROPERTIES

These go fast. There is a national market for these investments through the internet searches.

Many factors go into a successful acquisition, but timing and luck are often the most pivotal factors. To a large degree, we can influence both.

If there is such a thing as a successful buyer profile among our regular clients, it would be the simple marriage of the following:

A buyer who is consistently committed to taking decisive action in a timely manner.

A buyer with realistic acquisition criteria who maintains practical flexibility when considering opportunities that come reasonably close.

Once you decide to trade or acquire property in an exchange context, the following are simple yet critical strategies that will help ensure

your successful acquisition.

FLEXIBILITY IS THE KEY!

With an open mind, keep the search parameters as broad as possible. A “blinders on” approach from a geographical, tenant or ROI perspective can severely impede the search. It can cause you to miss out on some excellent but briefly available opportunities on the periphery.

Consider more than one tenant category e.g., restaurants, drug stores, post offices.

Consider both corporate and franchisee leases.

Geographical parameters could involve regions vs. cities in several regions. Include the San Francisco Bay Area. Remember that this is but one region with extremely limited supply, where demand far outpaces that supply. There are many other viable and superior opportunities throughout the country.

Beware the Quest for the Unicorn! Certain properties are known in the industry as “unicorn”. An example is a twenty year NNN Corporate AAA

rated tenant lease with 5% increases per annum. It is located at Main and Main at a high traffic, signalized intersection in a major and rapidly growing metro area. This would include an 8.5% initial return priced in the $1,000,000 range or below. The unrealistic quest for these types of properties can squander precious time and rapidly derail your search.

BE PREPARED TO ACT QUICKLY

Competition for single tenant NNN leased property is extreme and the time and opportunity to act is limited. Quick responses and consistent decisive action are critical factors in securing your acquisitions. Many searches and transactions fail due to prolonged discussions and requests

for input or validation from multiple parties. Risky pontification and analysis of points ultimately may not be significant before due diligence. Meanwhile, another party is simply taking action.

BE WILLING TO FOLLOW MARKET DRIVEN OFFER PROTOCOLS

A typical competitive offer in the current market would be structured as such:

At the asking price

Twenty days of due diligence. It is important to note that although the recommended due diligence time appears short, normally all

due diligence is available in a very organized form. Review of this material can be completed in a very short time frame.

Close of Escrow in 30 to 60 days.

All cash where possible. The financing on these properties is very straightforward and can be done parallel to the due diligence.

If financing is used, establish financing relationships and paperwork as soon as possible to expedite the process.

You want time to be on your side. Offer presentation terms outside of these general parameters (or with the expectation of a counter offer, for example) may cost you critical time when other parties are presenting offers based on marketed terms.

Be prepared to incorporate the seller’s preferred offering format.

START RESEARCH AND SITE SEARCH EARLY

Hire a commercial agent or agent team dedicated to a focused, productive search. There is far more to actually securing an acquisition than surfing the internet and identifying random properties. A lot of the critical work actually begins after the initial search. For example:

Continually tracing and confirming availability of properties meeting your criteria.

Clarifying and following offer and letter of Intent protocol precisely so that your offers receive serious and immediate consideration.

A competent, dedicated agent can keep the search and acquisition process fast paced and well managed. Let your agent know your general parameters and keep them apprised if these parameters should change at any time.

Make it a goal to have your three ID properties under control (contract or LOI) in the first three week of the ID period.

HAVE FUN WITH THE PROCESS!

This can be a fast paced, interesting process where you’ll see and learn a lot. Have confidence that what you’re going to be buying is

a high demand product. In the very worst case scenario, you have a flexible exit strategy in which you can typically resell without a fuss.

Focus on areas you would like to visit or vacation!

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