With STNL (single tenant net leased) properties there is often a misconception that these are easy to buy and you can’t go wrong purchasing a single tenant NNN property. Nothing could be further from the truth. Both as an investor myself and a principal broker I usually review over 1,000 single and multi-tenant NNN properties a week.
What I have found over decades of time active in the space is there can be a lot of lemons.
Here are some Key negative items to watch out for.
- Overinflated rent
- Weak Tenant
- Mid Block location with little activity around the site
- Older building with landlord responsible for roof/structure on a NN lease
- Poor sight lines (down in a hole – up on a hill)
- Bad access (Median to turn around, turn in no traffic light or stop sign, etc.)
- Leasehold property
- Under 6 years remaining primary lease term
- Not close to main intersection
- Surrounding tenant poor quality and doesn’t draw much traffic
- Business located on wrong side for type of company (returning home or going to work side)
- Lease structure not optimal (little to no rent guarantees, early termination clauses, zero rental increases, restrictive business use language too heavy for landlord, excess fees charged for ordering of estoppel and SNDA from the tenant, business owner can sell business without owners approval of new operator, no ongoing financials disclosed personal and business from the tenant so landlord can track how well they are doing and chances of long term success at the location, no sales figures, rent holiday in primary term of the lease, etc.
- Low traffic counts (under 15,000 vehicles a day)
- Low population areas (rural, small suburban) – under 50k population 5 mile radius
- High crime areas (pay special attention to violent versus non-violent ratios for offenses)
As you can see this is just scratching the surface of what to look for and may be surprising to potential purchasers of STNL NNN that all these metrics and more are involved.
Here are some Key positive items to look for.
- Below market to at market rents
- Investment Grade Credit Tenant
- Central Location at or around red light with high traffic counts
- Brand new or newer construction with warranty for the building and the roof
- ABSOLUTE NNN with no landlord responsibilities
- Great sight lines (Level or slight elevated ). Easy to see from far away.
- Great access (Ability to easily turn in from the red light and many interconnected roads within a commercial development to get around without having to go back out on the highway).
- 7 years plus remaining primary lease term (preferably 10 to 15 years)
- Excellent surrounding national brand name tenants large and small (Starbucks, Wal-mart, etc.)
- Your tenant with their business model located on optimal side of daily road traffic for success
- High population areas – 50k plus in 5 mile radius (Strong Suburban & Urban Core)
- Low crime areas with well staffed police and fire services