How can I invest passively in commercial real estate?
NNN property investments are quite the sweet-spot for high net worth individuals who are seeking to dip into commercial real estate investing. Passive real estate wealth, starting with an absolute triple net lease through either a direct purchase, a 1031 exchange or to be set up for passive retirement investing, is achievable for qualified and accredited investors.
Frequently Asked Questions
What is zero cash flow?
Zero cash flow happens when all monthly rent paid from the business tenant to the property owner goes to pay the mortgage. Equity builds up faster and the loan is paid off typically at the end of the primary tenant lease term.
What does vehicle stacking mean?
Vehicle stacking refers to QSRs and other commercial property’s ability to hold a certain number of vehicles without causing traffic issues. Higher stacking capability increases the value of the asset for investment purposes.
What does the term ‘Value Add’ mean?
‘Value Add’ is an NNN INVEST term which describes the purchase of a ‘dark’ building, seeking syndicate investors to join a 3-year investment cycle. During the cycle the building is repaired and leased, adding immediate appreciation to the property value with the additional benefit of cashflow from tenancy. The property is sold and the gains are distributed to the limited partners and the general partner.
What makes an unsubordinated lease take place?
An unsubordinated lease happens when a landowner maintains their first position in the hierarchy of claims on the asset. In this case, a lender would not have the right to take back the land in the case of a default by the tenant.
What is the purpose of a title policy?
A title policy is an insurance policy meant to protect buyers and mortgage lenders from damages or financial losses caused by a bad title due to title defects.
What is the title company?
The title company is the entity responsible for verifying the validity of a commercial property’s ownership and title. It’s legally required to be engaged during the purchase or sale of any commercial real estate.
What are tenant improvements responsible for?
Tenant improvement (TI) is work undertaken by the tenant to improve on a commercial property. It invariably increases the overall value to the owner while being an expensible cost write-off for the tenant. On certain occasions the landlord does TI on behalf of the tenant.
What are the tenant cycles?
The tenant cycles begin with site selection, progressing through an offer to lease. Next comes the lease itself, then periodic lease renewals, which often leads to assignment, which in turn leads eventually to termination (e.g. sale of building, folding of tenant company, natural disaster, etc.).
What is the role of a tenant?
A tenant can be a company or an individual leasing the property from the owner on a pre-determined duration of 5, 10, 15 years or more.
What is a syndicate in relation to investing?
A syndicate is a limited partner, one in a group (of syndicates) who mutually invest in the same commercial real estate. They invest for the purpose of collectively affording a larger property and receiving benefits otherwise unrealized as an individual investor (higher net gains, better rates of return, lower interest rates on loans, etc.)
What defines a ‘sweet spot’?
A sweet spot, subjectively, is the fine tuning of negatives and positives, risk and reward, to discover the best location for a NNN lease, and the best scenario for profit-generating income vs. risk of investment, etc.
What is a subsidiary?
A subsidiary is a subordinate company that is controlled by a larger holding company.
What is STNL?
STNL, or Single Tenant Net Lease, is typically a stand-alone commercial building owned by an investor and leased to a tenant.
What does ‘stepped up basis’ mean?
Stepped up basis is an adjustment in the cost basis of an inherited asset that ‘stepped up’ to its fair market value on the date of the decedent’s death.
What is the purpose of standard depreciation?
Standard depreciation uses the basis of 39 years to equally depreciate an asset (such as a commercial property) for annual taxation purposes.
Who is Standard & Poor’s?
Standard & Poor’s (S&P) is a leading company which operates as an index provider and data source of independent credit ratings on businesses.
What is SNDA?
SNDA stands for Subordination, Non-disturbance, and Attornment. It is an agreement which lays out certain rights of the tenant, the landlord, and related third parties, usually existing as a beneficial document for all parties. These are typically ordered by the lender. The language of the SNDA form has to be reviewed and approved by the lender and tenant.
What happens during a site inspection?
A site inspection involves analysis and legal reporting of the land on which the commercial property resides and the building itself. It inspects environmental situations, drainage and/or erosion, building viability, and needed repairs. The property must pass inspections prior to receiving certificate of occupancy.
What is the purpose of service contracts?
These are contracts in place – or required to be – to service the utilities, maintenance, etc. of a commercial retail property.
What is the purpose of a sale leaseback?
A sale leaseback is when a company or an individual who sells a commercial property and immediately leases it from the new owner.
What are REITs?
REITs are companies that own, operate, or finance income-generating commercial real estate, and are similar to how a mutual fund works for individual personal finance investors.
What is real estate professional status? (REPS)
REPS is a designation given to anyone that qualifies to claim that they work on real estate and related work most of the time (720 hours annually). The law includes additional benefits to REPS, and full-time brokers and agents typically automatically qualify for REPS. Those not licensed trying to claim the deduction must get with their tax professional for legal advice and steps required by the IRS to follow.
What is purchase and sale agreement?
PSA, or SPA, is a binding legal contract that obligates a buyer and seller to buy and sell a commercial property.
What is the purpose of a property management company?
This company is usually a third party retained for a monthly management fee to oversee tenant usage of a commercial property on behalf of the owner.
What is the purpose of a profit & loss statement?
A profit and loss statement is a type of documentation showing all incoming financials, as compared to outgoing expenses, on a given time period, typically quarterly and annually.
What is a preferred return?
A preferred return is operational income percentage that is allocated up to a certain rate of return to an investor before other distributions can be made to the General Partner.
What is phantom income?
Phantom income is a type of income a business owner has to pay taxes on, despite not having received any cash to pay the tax from the business. Problems usually arise because of the difference between allocating income to owners for tax purposes and distributing actual cash. Please check with your CPA or tax professional on any tax topic related to potential phantom income questions.
What is a personal financial statement?
A PFD is a detailed spreadsheet to show individuals assets, liabilities and routine expenditures. It’s often used to determine a detail of Net Worth & Liquidity.
What is personal guarantee?
This is a guarantee that can be partial or full-recourse for the individual and cover one or more of their properties (also known as cross-collateralize).
What is a passive return?
Passive returns are net monetary gains without effort or headaches of property management.
What are ownership documents?
Ownership documents are signed documentations to show details of and proof of ownership.
How do operating expenses work?
Operating expenses are cumulative amount of dollars required to operate a commercial retail property. They include rent, CAMs, utilities, etc.
What makes a town ‘one economy’?
A one economy town has one main larger employer and, if that business goes dark, a domino affect of remaining mom and pop companies begin failing and people start leaving the area.
What defines a non-cumulative CAM cap?
A non-cumulative CAM cap is a ceiling on annual increases in CAM (controllable) expenses. It does not allow a landlord to recover any unused increases from previous years.
What is an example of a non-controllable item?
A non-controllable item can be expenses like property taxes where the owner has no control over what is being charged from the local authority. In a multi-tenant net lease, these items are included in CAM items above base rent being charged; this is paid as additional rent (CAM) to the landlord.
What is an NNN broker?
An NNN broker is a type of real estate broker or agent that specializes in transacting single tenant and multi-tenant properties for buyers and sellers. They get paid a fee from the seller, the buyer, or even both depending on the deal.
What is NN Lease?
Similar to NNN lease, NN lease is differentiated by the taxes, insurance and maintenance being the responsibility of the tenant or the owner based on the lease terms.
How do you know your net worth?
Your net worth is your individual financial worth, determined by a simple sum of total assets – liquid and illiquid – minus total debts.
What is a neighborhood street retail?
This is often a pedestrian-centric retail center providing goods and services accessible from a sidewalk, and includes retail stores, groceries, etc.
What is MTNL?
MTNL stands for Multi-Tenant Net Lease, which is a lease used in a building of various tenants (as little as 2 to over 50 in some cases) that has base rent, plus CAM where the tenant reimburses the landlord for the expenses.
What is an example of a mortgage pay down?
Mortgage pay down is a way to build equity in a property over time, reducing the principal balance owed on a loan.
What is the purpose of a letter of intent?
An LOI is a non-binding document spelling out under what conditions a buyer would like to purchase a property from a seller/owner.
What is loan-to-cost ratio?
LTC, or loan-to-cost ratio, is a metric used in commercial real estate construction to compare the mortgage on a building with the cost to build.
What does the term loan-to-value mean?
Loan to value, or LTV, is an assessment of debt risk that lenders examine before approving a mortgage. An example of this would be if a building has an appraised vale of $2M, and the lender approves a mortgage on the property of $1.5M, the resulting LTV would be 75%.
What is cash liquidity?
Liquidity can be cash on hand, bank accounts, stocks, etc., as well as funds that are easily convertible to cash.
What defines a lender?
A lender can be an institution such as a bank, essentially a credit union extending money and credit to a purchaser wanting to buy an asset.
What is the purpose of leasing commissions?
These are fees paid to NNN leasing brokers for procuring a tenant to fill a space, whether it be a single or multi-tenant building.
What are leases?
Leases are agreements between the business(es) and the landlord which define rent payments, guarantees, rental increases, sales disclosures, length of primary rental term with options, etc.
What does a leasehold mean?
A leasehold is when the owner owns the building but not the land it is built on.
What is the purpose of a landlord?
A landlord is another name for a land owner, as well as a building and land owner.
What is an investment grade tenant?
Investment grade tenants tend to be BBB – or better rated by – Standard and Poor’s Credit Rating Agency. Fitch’s and Moody’s also have other ratings but many lenders look at Standard and Poor’s as the guide to follow
What are insurance certificates?
These are policies by the landlord and tenant showing adequate coverage for property, businesses, and real estate.
What is illiquid money?
Illiquid is a term for money tied up in hard assets: personal/investment property, retirement funds, etc., making it difficult to access as cash.
When is a ground lease used?
A ground lease comes in use when a tenant constructs a building and leases the land from the owner.
How does geo-diversification work?
Geo-diversification happens when you invest in multiple markets and locations so not all your investment dollars or assets are in one spot.
What are cumulative CAM caps?
Cumulate CAM caps are limits imposed on how much expenses can rise the tenant pays each year over their base rent. With cumulative any unused amount typically rolls over until the next year – if expenses are allowed to rise by 5% and they only rose by 3% that year, you the property owner could carry over 2% for 7% rise in cost available for the following year.
What does it mean to be credit rated?
To be credit rated is to be rated by the public credit agencies like Standard and Poor’s as a publicly traded company.
What defines a general partner?
A general partner is a person or group that runs a syndication and makes most of the decisions.
What is a fund?
A fund is a type of syndication strategy whereby instead of an investor deciding to invest in a certain property, they invest with a certain company (fund). That company has a pool of money that they allocate how they want over a certain period of time. If the money is not invested in the allotted time the money is returned to the investors. Caution is advised due to the fact that fund managers occasionally might buy more marginal properties toward the end of a time limit when they need to deploy remaining capital of the fund.
What are examples of expansion plans?
Expansion plans include national, regional, franchisee, or mom and pop business tenant’s plans to add more locations in cities, counties, states, and other regions of the country.
What is an estoppel?
It is a signed document from a tenant stating that the shown lease and any amendments are true, accurate, and no verbal or unknown written agreements exist.
What are equity multiples?
Equity multiples are how often the initial invested money doubles for overall return. An example of this would be if $100k is invested in a property to $200k, the overall return is a 2X equity multiple.
What happens in Environmental Phase One?
Environmental Phase One typically checks for any contamination issues of the building and land a buyer is purchasing. It also includes looking at other sites within close distance to assess risk to the site being purchased.
What is the ECR agreement?
The ECR agreement is similar to the CC&R agreement, which put simply is a planned development with rules that an owner must follow.
What is the economic cycle?
There are four stages to the economic cycle: the first stage is the ‘peak,’ or the high point. Next comes ‘recession’ which is the downward slide that leads to ‘trough,’ which is the lowest point or rock bottom. Finally comes the recovery stage, which includes economy improving and on the upward trend.
What defines earnest money?
Earnest money is typically a deposit amount put down in good faith based on a certain percentage of the purchase price to buy a property. It’s a way of showing the seller that the buyer is serious.
What happens in the due diligence/contingency period?
Due dilligence or contingency period refers to time allowed generally in a purchase and sale agreement (PSA) to conduct inspections, review sellers paperwork, etc. to verify details of a property.
What is the purpose of a developer?
Developers are commercial real estate investors who buy land and develop buildings with business tenants on it. If they choose to ground lease the land, this gives the tenant an opportunity to construct their own building on the land.
What defines debit service coverage ratio?
Debit service coverage ratio, or DSCR, is cash flow available to pay current debt obligations. Lenders have various ratios required for different types of properties. For example, if a property is brought in $1.25 in revenue for every $1.00 in debt, the ratio would be 1.25.
What does debranding mean?
Debranding or de-branding is a demand a tenant makes that is well known when they are leaving a building. They do not want the public recognizing their brand on a building they no longer occupy, so they often ask the property owner to de-image the outside shell of the building, making it look like a basic box for the next tenant.
What defines daily feeder traffic?
It is traffic coming from the main road, or coming from the large back anchors like Wal-mart. In basic terms, it is the energy intensity made up of the amount of people and cars moving around the commercial property you own.
What is the cost segregation study?
Cost segregation study is a study completed typically by an engineer firm. Their goal is to break out real property components (electrical, plumbing, carpet, etc.) into shorter life span years ( 5,10,20, etc.) for tax depreciation purposes – versus the regular 39 years for commercial real estate.
What is the purpose of a commercial retail attorney?
A commercial retail attorney is specifically focused only on the commercial real estate space (single and multi-tenant properties).
What is a CO?
CO stands for Certificate of Occupancy. It is a document issued by a local government agency showing that a unit or building is suitable for occupancy.
What is cash on cash return?
Cash on cash return is cash flow that is measured related to the amount of cash invested into a property. For example, your initial (going in) cash on cash return could change based on how much money (loan to value) you are putting on a property, the interest rate, and amortization schedule.
What is a capital markets mortgage broker?
A capital markets mortgage broker is a commercial loan broker who procures quotes from various lenders and helps a buyer choose one. The broker then guides the buyer through the loan process until closing on a property.
What is cap rate?
Cap rate pertains to a value commercial real estate that typically sells for in a certain market. An example of this would be a property bought for $3 million all cash with a 6% cap rate; the property would have a return of $180,000 annually.
What are CAM charges?
CAM (or common area maintenance) charges are charges that are above the base rent a tenant pays to the landlord. These charges often include property, taxes, property management, landlord insurance, and maintenance to the property.
What is a building permit?
A building permit is approval by a local government authority to begin work on a project. The project is monitored from start to completion to make sure quality and safety standards are met according to local building codes.
What does the term ‘built to suit’ mean?
This term describes where a landlord constructs a property to a particular tenant’s specifications.
What is the ALTA Level 1 survey?
ALTA stands for the American Land Title Association. It is a set of principles and methods for surveying standards, and typically encompasses a combination of a boundary, as-built, and title survey.
What are DMD’s (double money deals)?
This is the NNN Invest syndication goal of looking for value add investments that in a 3 year maximum time span will double in value once stabilized.
What does the term ‘dirt first’ mean?
At NNN Invest, we use this term to refer to valuing the investment of a property not just by the credit of the tenant of the lease, but more importantly in the long term, by the location and quality of the land.
What determines if a property is a dark building?
A dark building is a commercial building where the tenant no longer operates and might or might not still be paying the rent. It could also be a building that the tenant has vacated and no longer operates or has a lease on.
What are controllables in relation to commercial real estate?
In terms of commercial real estate, controllables are items that a landlord typically has some control over keeping in a certain budget (maintenance, property management fees, etc.) as it relates to CAM (Common Area Maintenance) expenses.
How do cumulative CAM caps work?
Cumulative CAM (Common Area Maintenance) caps are limits imposed on how much expenses the tenant pays can increase each year over their base rent. With cumulative caps, any unused amount typically rolls over into the next year. This means if expenses are allowed to rise 5% and they only rose by 3% that year, then they property owner could carry over 2% for a 7% rise in cost allowed the following year.
What is the purpose of accelerated depreciation?
This is a tax technique that allows you to break out certain real estate property components into shorter time frames than the standard commercial property depreciation of 39 years to help offset taxes on income that the property generates.
What is an Absolute NNN Lease?
An Absolute NNN Lease is when the landlord is completely passive with the property and the tenant pays for property taxes, insurance, and handles maintenance. The landlord sits back and collects mailbox money.
What is a 1031 exchange?
A 1031 exchange is a process by which a property owner can tax defer capital gains and tax depreciation recapture from the sale of their real estate property into another.
Why do you ask for a minimum of $200k on liquidity, and $2m for net worth, before engaging in an agreement?
To purchase a property directly with a good, sustainable location (as well as other factors), the net worth should be close to $3m including between $800k and $1m for the down payment. If you do not meet these minimums, you can inquire about our syndication options.
What is market rent?
The market rent refers to the market value of a rental unit for lease based upon comparable rental rates for similar units in close proximity to the subject. Used to calculate value, cash flow, and potential loan amounts.
What does internal rate of return mean?
The IRR is calculated based on all future anticipated cash flow, principal pay down of debt, and proceeds on the exit of a property.
What is a holding period?
The holding period is the amount of time the sponsor plans to hold the property.
What is exit strategy?
This is how the syndicator plans to cash investors out of their investment in the future. This may be by selling the property, purchasing their shares, or refinancing them out.
What are distributions?
These are the funds paid out to investors. These profits may be paid monthly or quarterly or upon a successful exit.
What is cash flow?
Remaining liquid profit after deducting operating expenses and any debt service payments.
What does capitalization rate mean?
The cap rate. Calculated by dividing net operating income by the current market value of a property to determine an expected rate of return.
What is active investing?
This is the opposite of passive investing. An active investor does all the work of finding, structuring, managing, and exiting investments.
What is an acquisition fee?
Compensation earned by the general partner in a syndication for sourcing, screening, arranging to finance, and closing on an investment asset.
What is an accredited investor?
This is an investor that typically has either:
- Earned income that exceeded $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years, and reasonable expects the same for the current year
- Has a net worth over $1 million, either alone or together with a spouse or spousal equivalent (excluding the value of the person’s primary residence)
What is corporate entity?
Corporate entity is entity the property tends to be held in by the owner. It’s important make sure the seller signing the purchase and sale agreement has the authority to sell the property and the authority to bind the property owner to sell.
What is a closing date?
A closing date is a certain period in time when the title or the attorney (depends by state) is ready to close the transaction. A lender typically refers to the closing date as the funding date for the loan. All documents must be turned in by both the buyer and the seller to be ready to close on the property, along with lender fund (based on a property with financing).
What is CC & R agreement?
CC & R stands for Covenants, Conditions, and Restrictions. This agreement is a planned development with rules that an owner must follow. It is imperative to read the document before closing on a property to know what obligations you will be taking on as a new owner.
What is amortization?
Amortization is typically the number of years (your schedule) – which can be 15, 20, 25, or 30 years – that loan payments are based on.
What are active returns?
Active returns are an example of owning certain real estate asset types where an investor has to put in daily time with actions to generate a return on their investment.
What is accelerated depreciation?
Accelerated depreciation is a tax technique to break out certain real estate property components into shorter time frames than the standard commercial property depreciation of 39 years. This is to help offset taxes on income the property generates.
Why is there a 1% Fee?
As a premium service to buyers, we have a FEE MINIMUM. Listing brokerages often focus on a volume business model. At NNN INVEST we chose to focus on quality, helping buyers reach their investing GOALS.
What is a limited partner?
In contrast to the general partner, a limited partner’s liability is limited to the extent of their share of ownership. In typical real estate syndication, a limited partner is a passive investor who puts in the capital.
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