What You Need To Know about Net Leased investment
Commercial real estate requires tenants to pay rent and net lease. These are expenses that would otherwise get paid by the landlord. The expenses are referred as NN lease, NNN lease or ground lease. The lease is usually given to tenants in written form. Below are a few factors you need to put into consideration to evaluate net leased investment.
First, you need to know who will be guaranteeing the lease. Corporate guarantees are usually the most preferred. It is risky to choose individual guarantees. Get to know the lease structure and the how long are the terms of the lease. If the same tenant intends to stay on the property for a long time, then a long term lease is more preferable than a short term one. It is important that you view all the other options that a tenant has. In case there are no other available options, you can negotiate the lease if the tenant intends to keep staying and the end of the lease is near. This is why most people prefer long base terms with longer options.
Secondly, the location of the property will determine if it is re-leasable in case the tenant leaves. It is common for tenants to pay more than the market rate to get the best locations. For example, fast food is the easiest to re-lease as they are usually similar in size while distribution facilities such as Fed Ex are hard because of the large spaces. It is easier to find someone to replace a tenant who pays way below the market rent.
It is also important to know your exit strategy for net leased investment. You have to develop a strategy that you are sure will give you cash in the long run. An exit strategy is vital if you notice that you have reached your hold period and there is still no progress. It is wise to know the resale market in case you decide to sell your investment. You may love your business idea but it fails to add value to the area investors, this will in turn limit the buyers if you decide to sell. This is why research is important before getting into net leased investments.
It is also vital that you get to know of rent escalations ahead of time. if so, get to know by what percentage and at what frequency. There are certain rental categories that offer high rent escalation compared to others. Typically fast food leases tend to increase annually or over an extended period of time while drug stores normally don’t offer rent escalations. It is wise to view the credit rating of tenants. This provides a sense of stability meaning you won’t have issues time to time. There are companies that offer advice on finding property that is right for your investment. This is why you have to consult and research before getting involved in net leased investment.