NNN lease properties – pay attention to these numbers and calculations

The following calculations and numbers are key for successful NNN investing. Read on to see why.

The 3 N’s

A triple net lease or NNN lease is one in which an investor’s tenants pay a base rent or “net rent” plus three other charges. In other words, each charge below is a “net” deductable from a “gross” amount which is the sum of the base rent plus all the three charges:

•     Property Taxes
•     Property Insurance
•     Common Area Maintenance

All these charges form one estimated amount or rate for the year, but the actual charges true up at the end of each year. NNN tenants will pay a base rent, and either be reimbursed or credited for the difference between the total of the estimated charges paid in advance and the actual annual charges. A NNN lease rental calculation is typically as follows:

Lease Rent: $30.00/sq. ft. NNN (Estimated NNN = $4.25 / sq. ft.)

These numbers mean that the fixed base rent a tenant will pay is $30.00/sq. ft. per year, and the variable property expenses (aka NNN), which include property taxes, maintenance and insurance, are estimated at $4.25 / sq. ft. per year. The NNN lease prices are set by the landlord, but they must be based on the actual expenditures. Most agreements specify how NNN expenses are calculated and are included as lease provisions.  Each year, the landlord must calculate actuals and deliver a report to tenants. The triple net charges are estimated at the inception of a NNN lease, but the actual NNN expenses will vary.  Based on the negotiated lease, NNN landlords may also be entitled to charge tenants specific and defined yearly capex.

Cap rate

The cap rate is annual NOI divided by the asset’s purchase price. Capitalization rates are not useful in a vacuum; instead they are best used together with other investment metrics. If a NNN investor wants to cover the cost of purchase rather quickly, they will buy a property which has a higher cap rate. To determine a “safe” cap rate, a triple net lease investor must identify how much risk is best undertaken. Quinessentially, a lower cap rate implies lower risk, while a higher cap rate implies higher risk. The most important thing is to understand one’s own risk preferences and buy or sell accordingly, and always use a cap rate number in addition to other calculations.

Mortgage

To understand how triple net lease mortgages work, let’s assume a NNN property loan is $2.0 million, $600,000 down, with 7.5% APR, and a term of 15 years. Repayment terms include: a principal and interest payment of $13,000, or a $8,750 interest-only payment, and a $1.0 million balloon payment at the end of 5 years. Lenders conduct background checks on your personal and business credit history. Commercial loan rates are often slightly higher than residential mortgages and NNN loans currently range between 6.3%-15%. If a property needs active management (an instance of higher risk for the lender) then the lending rate can be higher still. Lenders typically accept 60 to 80 percent LTV for triple net lease loan borrowers.

Call Robert Gamzeh and the Triple Net Investment group team today to get ahead with the myriad of calculations required to make excellent buy or sell or 1031 exchange triple net lease decisions. Tried and tested over many decades, you can be assured of the best guidance in today’s complicated NNN property market.

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