NNN Leased Investments

Long term leased properties with credit tenants can offer potential income without burdensome management responsibilities. NNN properties can provide long-term leases, and credit tenants, as well as attractive financing and tax benefits. However NNN do require an understanding of the underlying lease and tenant obligations.

There are numerous ways to take ownership of NNN leased properties.  They can be available as individual purchases or through public and private REIT structures which provide a share of ownership among potentially hundreds of properties nationwide.

Because definitions of triple-net leases differ the lease must be thoroughly examined to determine liabilities and obligations. Generally a net lease refers to the arrangement where the tenant pays all or some of a property's operating costs in addition to rent. Several general gradations of net leases have evolved over the years. These are summarized here, ranked from strongest to weakest, beginning with the lease that gives the tenant absolute responsibility for the real estate in exchange for absolute control.

  • Bond Lease. The tenant is fully responsible for operating expenses, maintenance, repairs, and replacements for the entire building and site, without limitation.
  • NNN Lease. These leases follow the bond lease definition except that capital expenditures are limited, usually in the final months of the lease. The lessee is liable for all of the property's expenses, both fixed and operating.
  • NN Lease. This lease follows the NNN, except the landlord is responsible for structural components, such as the roof, bearing walls, and foundation.
  • Modified Net (or Modified Gross) Lease. The tenant pays its own utilities, interior maintenance and repairs, and insurance. The landlord pays everything else, including real estate property taxes.

Regardless of the type of net lease, many fluctuations, such as increasing utility costs and changes in government regulations, cause problems under rigid lease terms over time. Investors must be aware of lease nuances that may seem innocuous but require knowledge and planning in order to avoid future disappointments or disasters.

Today new leases take inflation factors into account by specifying periodic rent increases, with options, if any, pegged to "fair market rent" or other indicators that preserve the income level. The trend toward mergers and divestments adds another dimension to credit reviews. Even though the resulting entity usually is stronger than the original company, the risk of the unknown can be perceived as a negative factor.

All categories of office, industrial, retail, multifamily, and hotel properties, and even undeveloped land, can be sold on a triple-net-lease basis, without regard for size, design, or location. However, retail, office, and industrial most often are available in the marketplace.

This does not constitute an offer to sell or a solicitation of an offer to buy any security. Such offers can be made only by a Private Placement Memorandum. These investments involve a high degree of risk and are not suitable for all investors. Please refer to the Risk Factors section of any specific Private Placement Memorandum.