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How to Evaluate a NNN Leased Properties​

NNN Leased Properties

Effectively evaluating a NNN leased property is critical to minimizing risks and maximizing returns. The team at Triple Net Companies has conducted over $2 billion dollars of real estate transactions and we do so at NO COST TO YOU, THE BUYER. We are paid entirely by the seller.

How to Evaluate NNN Leased Properties

Evaluating a triple net (NNN) leased property is a critical step in ensuring a sound investment. This comprehensive guide will walk you through the essential steps to effectively assess a NNN property.

1. Property Inspection and Evaluation :

Physical Inspection :Hire a professional inspector to evaluate the property’s condition, including the roof, HVAC systems, plumbing, and electrical systems. This helps identify any potential issues that could lead to costly repairs.

Environmental Assessment :Conduct a Phase I Environmental Site Assessment to identify any potential environmental issues. This is crucial for avoiding future liabilities.

2. Financial Analysis :

Lease Agreement Review :Analyze the lease terms, including rent amount, escalation clauses, renewal options, and tenant responsibilities. A clear understanding of the lease terms is vital for predicting future cash flows.

Tenant Financial Health :Assess the tenant’s creditworthiness by reviewing their financial statements and business stability. For corporate tenants, consider their credit ratings from agencies like Moody’s or S&P.

Rent Comparables :Compare the rental rates with similar properties in the area to ensure they are competitive and reasonable. This helps in understanding the market position of the property.

3. Legal Review :

Title Search :Perform a title search to verify ownership and identify any liens, encumbrances, or easements. This ensures there are no legal obstacles to the transaction.

Zoning Compliance :Ensure the property complies with local zoning laws and regulations. This is essential for avoiding legal issues that could affect property use.

Lease Terms :Have a real estate attorney review the lease agreement for any potential legal issues or unfavorable clauses. This ensures your interests are protected.

4. Market Analysis :

Location and Demographics :Evaluate the property’s location, accessibility, traffic patterns, and surrounding demographics. A prime location with favorable demographics can significantly enhance the property’s value.

Economic Trends :Research local economic trends, employment rates, and future developments that could impact property value. This provides insight into the long-term viability of the investment.

5. Operational Due Diligence :

Property Management :Assess the current property management setup and evaluate if any changes are needed. Effective management is crucial for maintaining property value.

Maintenance History :Review the property’s maintenance history and any upcoming major repairs or capital expenditures. This helps in budgeting for future expenses.

6. Tax and Insurance Review :

Property Taxes :Verify the current property tax assessments and understand potential future increases. Accurate tax forecasting is essential for financial planning.

Insurance :Ensure the property is adequately insured and review the insurance policies for coverage details and costs. Adequate insurance protects against unforeseen events.

7. Exit Strategy :

Resale Value :Evaluate the property’s potential resale value based on market trends and comparable sales. Understanding the exit strategy is key for long-term investment planning.

Investment Horizon :Determine the expected hold period and potential exit strategies. Clear investment goals help in making informed decisions.

8. Document Verification :

Lease Abstract :Create a lease abstract summarizing all key terms and conditions. This provides a quick reference to essential lease details.

Estoppel Certificate :Obtain an estoppel certificate from the tenant confirming the lease terms and any modifications. This ensures there are no undisclosed lease changes.

SNDA Agreement :Ensure the Subordination, Non-Disturbance, and Attornment (SNDA) agreement is in place if the property has financing. This protects both lender and tenant interests.

9. Financing Considerations :

Loan Terms :If financing the purchase, review the loan terms, interest rates, and amortization schedule. Understanding financing options helps in optimizing investment returns.

Debt Service Coverage Ratio (DSCR) :Calculate the DSCR to ensure the property generates sufficient income to cover debt obligations. A strong DSCR indicates a healthy investment.