NNN Property Due Diligence Part 2 – Evaluating Leases

EVALUATING LEASES

You will probable get really good at this once you looked at dozens of “Offering Memorandums” or “Property Setups”. These documents are the sales package for the deal which shows the basic financial and tenant information on a particular net lease deal. It is important to understand what to look for based on your investment objective and needs as well as to make sure you actually have a good deal.

Having a good understanding of what the landlord and tenant obligations is important because you do not want to engage into any agreements without making sure certain aspects are included such as maintenance of the roof, structure and parking lot as well as taxes, insurance, HVAC and others. When dealing with a publicly traded company or large national corporation for the most part the individual location will uphold certain operational standards which is assuring. Although operations on site should be standard, you as the landlord must also double check to make sure everything is on the up and up. I recommend to review these documents along with your legal and financial counsel. Unfortunately their is not any consumer protection laws for getting into bad deals in the commercial real estate sector. Once you engage into an agreement the old saying is “Caveat emptor” or “Buyer Beware”.

Clicking here you can view a property set up sheet which shows the run down of a 7 Eleven net lease property. You should expect to see this when reviewing an opportunity, if not then you should be requesting it from the owner or the broker. Most of the information for the non trained eye is pretty basic, like location, price and other physical attributes but some of the more important aspects are the lease abstract and rental data section. For true mail box money you are looking for a absolute net lease tenant structure, which means the tenant is responsible for both the roof and structure expenses as well as guarantee from a high credit rating tenant. In the example of 7 Eleven net lease, the company is a publicly traded company, a AA, standard and Poors credit rated and provides corporate guaranteed rent. Additionally you will need to be aware of the annualized operating rent schedule. Some deals have a long initial fixed annualized rent (e.g. 50 years fixed) and others, like our 7-Eleven example have optional lease renewals with 10 percent rental increase every 5 years. The increases are important as this helps in the effects of inflation.

The tenant overview section which I explained in a earlier section gives you an overview of the tenant. For public companies like 7-Eleven, you are able to access their information just about everywhere. You will want to pay close attention to the company’s credit rating and who is the lease guarantor. Along with financial data we can also expect to see demographic information such as traffic counts, employment and population density. This is important to know because you want to be sure that the property you own is located in a thriving area that it can sustain a business of this nature. Most top companies, who you will be leasing to perform stringent research to ensure a spot they select to park their business has a great chance of success. Along with site level information you will also want to get your hands on historical store sales to look for continued success at this particular location. Some investors choose to own property outside of where they live in major metro and tertiary markets so knowing more about the area statistically is very beneficial. For the situation that a location that you buy goes dark or close after their lease is up, what do you do? Like with any investment their is always some sort of risk and triple net properties but you want to make sure you select an asset in a strong area in which youcan be able to lease that space to another qualified tenant.

Continue to part 3 of NNN property due diligence

Dwaine Clarke is a published author and founder of Clarke & Tinker Net Leased Property Group, a commercial real estate sales and advisory firm located in Connecticut. Connect with Dwaine on Twitter and Linkedin

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