Net Leased Investments are a type of commercial real estate investment common throughout the United States. Different forms of Net Leases define the obligations of lessor (owner, landlord) and lessee (tenant).
DEFINITION OF NET LEASES
The most common lease types are:
Single Net Lease: Lessee pays a monthly base rent and the property taxes. The owner is responsible for all other operating expenditures of the property.
Double Net Lease (NN): Lessee pays a monthly base rent, property taxes and property insurance. The owner is accountable for all other operating expenditures of the property. There are certain NN leases which split the maintenance responsibilities between lessor and lessee; for example: lessee pays all inside maintenance, lessor pays for roof and structure maintenance.
Triple Net Lease (NNN): Lessee pays a monthly base rent, property taxes, property insurance and the maintenance. In a NNN lease, there may be several legal protective clauses which could release a lessee of his obligations. For instance, a triple net lease may release the lessee of his accountability if the property is subject to an eminent domain procedure.
The net lease structure favors the landlord and makes the investment ideal for investors who are not local or who do not want to be involved with property management.
Critical to a successful net-leased investment is the quality of the tenant and, to a certain extent, alternative uses should the tenant vacate or default. In general, the stronger the tenant, the lower the cap rate (return on investment) will be.
TYPES OF NET LEASED INVESTMENTS
Industrial: local, regional or national tenants such as FedEx, manufacturers or distributors.
Restaurants: fast food such as Burger King, McDonalds, Taco Bell or Dunkin Donuts. Also sit-downs such as Macaroni Grill etc.
Retail: regional or national tenants such as Target, CVS, Walgreens, Office Depot, Staples or Sports Authority ("big box" retailers). Also includes sub-types such as Automotive.
Office buildings: with single or multiple local, regional or national tenants, such as local law firms or medical offices, banks etc.
INVESTMENT VOLUME AND RETURNS
Depending on the area, solid NNN investments can be found from approx. $600,000 and up, with cap rates starting at ca. 5.75% p.a. for the strongest tenants. Possible property appreciation is not included in cap rates and may be calculated separately (IRR).
Trophy properties and/or trophy states such as Florida often demand higher prices and thus lower cap rates. This trade-off has to be decided by every investor according to his/her preferences and investment goals.