Many investors have become dissatisfied with the problems associated with the stock market. In recent years, more and more investors have become familiar with the ease of owning commercial properties that are occupied by national tenants who are often credit rated, using the vehicle of a triple net long-term lease. The advantages with this format are that the tenant is obligated under this form of lease to pay for all expenses associated with the operation of the property including property taxes, maintenance, insurance etc. When this situation is combined with a National Credit Tenant, the investor can be assured of a management free property with a minimum of risk. Such companies as Walgreens, Walmart, Barnes and Noble, Winn-Dixie, 7-Eleven, Inc., IHOP, Pizza Hut and Sherwin Williams (net worth of over 1 billion $) are typical of the types of NNN leased investment properties that investors look for and that we will help you locate.
What kind of returns can an investor expect from these kinds of properties? A National average is a cap rate of 8.5%, with factors for growth. If an investor is willing to incur debt on this kind of property, if is often possible to see a leveraged cash on cash return rate that approaches 10%.
Green Realty Company, LLC has access to properties with National Credit tenants all over the Country. We can help you find this type of property in your region of the Country or anywhere that you would like to own an investment property.
Why Buy Net Leased Properties?
- Guaranteed income by a well known corporation.
- Sometimes financing is in place on net leased properties which can be assumed to meet the debt/equity requirements of Section 1031.
- New financing is usually available from a variety of commercial lenders on a variety of terms and conditions. Amortization schedules can run from 20 to 30 years with a call on the loan at 10, 15, or 20 years.
- Equity can be refinanced tax free after a 1031 exchange is complete.
- Net Leased Properties usually are located in superior locations, therefore the residual value of the real estate is usually quite good.
- Estate taxes can be favorably affected. Ask your attorney for his advice.
- Net Leased Properties can relieve you from management headaches associated with other types of income real estate.
WHAT IS A NET LEASE?
Net leased properties are usually single-tenant commercial, industrial or office properties with long term leases backed by corporate credit. These leases usually obligate the tenant to provide for real estate taxes, insurance, and building maintenance. Such tenants are Walgreen's, Home Depot, Blockbuster, Federal Express, Winn Dixie, Wal-Mart, Eckerd's, Walgreen's, Pizza Hut, etc.
Net leased properties, guaranteed by good credit are ideal exchanges for individuals who want conservative investment property with steady, long-term income but without responsibility for rental or day to day management. Historically, these properties have generated an annual cash on cash return of 8 to 10 percent, and when leveraged with a self-amortizing loan have generated in internal rate of return of approximately 15 - 17 per cent.
Types of Net Leases
Net Leases (N): Leases in which the tenant pays some share of expenses expenses. The more net a lease includes, the less financial responsibility a landlord or owner has.
Net, Net Leases (NN): Means that the tenant is responsible for all operating expenses and real estate taxes. The owner or landlord is responsible for the roof and structure.
Net, Net, Net Lease (NNN): Means that the tenant is responsible for all operating expenses, real estate taxes and the roof and structure.
There are various forms of Net Leases and all have varying degrees of net aspects. The most desirable is commonly called a triple net "bond" lease, which adds protection for casualty and condemnation.
EXIT STRATEGIES – WHEN I’M READY, HOW DO I GET OUT?
Real estate is not known as a “liquid” investment. That is, you cannot call up your broker, ask him to sell, and get a check in 6 days. You need to plan ahead and should not invest in any kind of real estate if you think you will need your investment out within less than a six month time frame. It is important to understand that in addition to the time it takes to market a property, there is time needed for inspections, due diligence, arranging financing and other closing matters. We will always do our best to expedite closing on your behalf, but experience has shown that a six month time frame is representative. We are affiliated with a national market which is accessible to us for selling and purchasing “used” single tenant properties.
UNDERSTANDING VALUATION
The most commonly used comparable in the Single Tenant Net Leased Property field today is the “cap rate”. You will hear references to this rate being quoted for any property you look at. The reason is that appraisers when valuing real estate use “comparables” and the “cap rate” approach to valuation is an excellent method of comparison. If you are looking at a Jack In The Box, Walgreen’s, Pizza Hut or other well known tenanted net leased property and you compare say 5 or 6 sales of comparably leased Jack In The Box, Walgreen’s or Pizza Hut properties, a close range of “cap rates” will become evident. The “net income multiplier” (NIM) approach is more commonly used in valuation of apartments.
Terms
NOI – NET OPERATING INCOME
CAP RATE – THE CAPITALIZATION RATE
MV – MARKET VALUE
NIM – NET INCOME MULTIPLIER
The Net Operating Income
The Net Operating Income is calculated as follows:
NOI = All Income – All Expenses
The Capitalization Rate:
The Cap Rate is calculated as follows:
Cap Rate = (Net Operating Income / Market Value) x 100
Cap Rate = (NOI / MV) x 100
Example:
Net Operating Income (NOI): $345,000
Market Value (MV): $3,450,000
Cap Rate = (345,000 / $3,450,000) x 100
Cap Rate = 10%
The Cap Rate of 10% represents the annual return before mortgage payments and income taxes on the total investment of $3,450,000.
Alternatively, if the Cap Rate can be established from comparables, we can determine the likely selling price of a property. For example, if the cap rate is 8 % based on comparables, and the Net Operating Income (NOI) for the building is $105,000 , the potential selling price can be calculated as follows:
MV = (NOI / Cap Rate) x 100
= (105,000 / 8) x 100
= $ 1,312,500
The Net Income Multiplier (NIM)
The Net Income Multiplier (NIM) is the inverse of the Cap Rate
NIM = 100 / Cap Rate
or Cap Rate = 100 / NIM
As an example, if the NIM is 11, the Cap Rate is:
Cap Rate = 100 / NIM
= 100 / 11
= 9.09 % B
Both the Cap Rate and its counterpart the Net Income Multiplier are used in the real estate industry to estimate the market value of a property. However, in recent times, the Cap Rate has become the more popular financial measure. Regardless of which measure is used; they both produce the same estimate of market value. The Net Income Multiplier is expressed as follows:
Net Income Multiplier (NIM) = Market Value / Net Operating Income
i.e. NIM = MV / NOI
Example:
Net Operating Income: $345,000
Market Value (MV): $3,450,000
NIM = MV / NOI
NIM = 3,450,000 / 345,000
= 10.00
Alternatively, if the Net Income Multiplier can be established from comparables, we can determine the likely selling price of a property. For example, if the Net Income Multiplier is 10.0 based on several comparables, and the Net Operating Income for the building is $345,000 , the potential selling price can be calculated as follows:
MV = NOI x NIM
= $345,000 x 10
= $3,450,000
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NET LEASED PROPERTIES NATIONWIDE 
