Introduction
At Noble Equity Solutions, we specialize in helping real estate investors to leverage proven strategies to maximize their returns on each property. One such approach is triple net lease (NNN lease) financing. With this strategy, developers, investors, and property owners leverage the benefits of NNN leases AND get access to surprisingly low-rate lending programs specifically reserved for triple net properties and the investment-grade tenants they attract.
What Is A Triple Net Lease?
A triple net lease involves an arrangement where the lessee is responsible for paying property taxes, insurance, and maintenance costs in addition to the rent. This model differs from standard real estate financing methods where these expenses typically fall on the property owner. These leases are most common in a single-tenant property in a prime location with easy access by road or by foot traffic drawn to a nearby anchor, such as a mall.
Decreased Volatility Through Triple Net Leasing
One of the significant financial benefits of a NNN lease is the secured, steady income stream it provides. Property owners can enjoy reduced variable costs since tenants cover most operational expenses, allowing owners to focus on cash flow and capital appreciation.
This rental strategy also enhances the return on investment and boosts property valuation by presenting a less volatile cash flow profile. Rental income is lower, but variable cost drops significantly, as the lessee shoulders this burden in exchange for greater flexibility in property styling and layout.
Advantages for Property Management
Triple net leases require minimal involvement in the day-to-day management of the property. Since tenants assume many financial responsibilities and operational tasks, property owners experience fewer management headaches. Additionally, the long-term commitments facilitated by financing options offer stability, making it easier to plan for the future and maintain consistent occupancy rates.
Passing Costs of Maintenance to the Lessee
The triple net lease framework shifts significant financial risks onto the tenants, protecting the owner’s investment. When the building needs to be painted, it’s up to the tenant to make decisions about the work to be done. If they want to redesign the layout or lighting, as long as it doesn’t impact the underlying access to utilities, the cost is borne by the client.
A triple net lease reduces the opportunities for variable costs to eat into the profit margin of the property owner. Moreover, a NNN lease can align property owner and tenant interests, as the tenant has far more control over the look and feel of the property than in a traditional lease agreement, potentially resulting in lower vacancy rates and increased property stability.
Lessors can focus on attracting tenants that will hold the property for decades rather than years, resulting in sound long-term cash flow.
Benefits to Tenants
Many standalone mid-sized-box stores – think Wallgreens, CVS, Auto Zone, Starbucks, McDonalds, and similar-sized stores want to brand their buildings from the sidewalk to the sashes and the front door to the delivery pad, but don’t want to lock up value in equity.
With a triple-net lease, lessees gain full control of any non-structural element of the building without having the burden of property tax and depreciation. Rent, which can be less than a mortgage comes directly off of taxable income, benefitting their books. Earnings are immediately distributable to shareholders rather than becoming tied up in equity. Lenders prefer these “investment grade” businesses for NNN loans.
What Are the Challenges with NNN Leasing?
Developers who want to see fast appreciation and high visual consistency among a variety of tenants at a property will choose to pursue gross-lease financing. To maintain a premium shopping center, maybe one that has canals, walking paths, and a consistent feel across numerous units will charge a premium to lessees and take on the maintenance, repair, and upkeep of the property.
In this instance, the lessee has to meet numerous criteria, from signage to flooring and lighting. In these scenarios, the lessor’s risk remains higher, but returns can be higher due to the promise of increased foot traffic and higher sales driven by the unified look and feel.
Financing Properties Leased with Triple Net Terms
Triple net leasing is a type of construction or acquisition financing used specifically for properties that are intended to be leased with triple net terms. Conventional real estate loans are not available for properties to be leased under NNN criteria, and likewise, conventional CRE investment properties, known as “gross lease loans” would not be eligible for triple-net financing.
The two main financing types for NNN leased properties are acquisition loans and construction financing. In cases where a lease contract has not been finalized, bridge financing may be available to acquire property while agreements are finalized and NNN financing is put in place.
Unique Nuances to Financing NNN Properties
Lenders often evaluate loan scenarios differently when the financed property has a NNN lease instead of a more traditional leasing agreement. The following are some of the most important factors that real estate investors and developers need to be aware of when exploring their financing options.
Intent to NNN Lease
To be eligible for NNN financing, the property owner and tenant or prospective tenant need to be committed to NNN financing. The leasing structure must be agreeable to both parties, and the lender must be satisfied with the net contract as well as the risk profile of the lessee.
Single Tenant
Another typical criteria is that the building holds a single tenant. For this reason, properties can be near a larger multi-tenant property such as a mall or shopping center. The lender is looking for an uncomplicated tenant scenario. In a multi-tenant environment if one tenant leaves, it can impact the profitability of other tenants.
Investment-Grade or Tenant with a High Credit Rating
Many of the businesses that help property owners qualify for NNN financing are either national brands that are traded on a stock exchange, or they have a high credit rating and multiple years of solid financials, demonstrated by audited financials.
Location
To receive the best terms, location matters. Traffic studies demonstrating ease of access, attractions in the area, and even foot traffic go a long way to showcasing the attractiveness of a deal.
Cash Flow
Lenders know that most borrowers will rely on the property’s rental income to cover the loan repayment. So to mitigate their risk, lenders evaluate whether the property will produce adequate income. They want to see the contractual terms of the leasing agreement, the cash flow of the owner, and the cash flow of the lessee. Lenders are looking for a Debt Service Coverage Ratio (DSCR) of 1.25 or better.
Lease Term
NNN leases rarely extend beyond the term of the lease. For that reason, lessees like CVS, Starbucks, Walgreens, McDonalds, and others willing to sign a 20-year lease result in the best rates for borrowers and become the most attractive for lenders. That exceeds many commercial loans, which can have a length of 5, 10, or 15 years.
When rental increases are built into the lease agreement it provides some assurance that inflation and other risks will be mitigated.
Borrower Criteria
Lenders also evaluate the borrower in areas like net worth, annual income, and credit score. Borrowers with a net worth of $1m+ or annual income of $200k individual or $300k married filing jointly are suited to this type of commercial real estate investment.
Often, NNN leases have a maximum term based on the lease that has been signed. A 25-year lease can provide a 25-year term. That exceeds many commercial loans, which can have a length of 5, 10, or 15 years.
In general, cash-flow-based loans can be applied to business costs as determined by the borrower, but each lender has their own criteria. The best rates and terms come from lenders that are aligned with your business goals and objectives. That’s where brokers like Noble Finance support borrowers the most – thoughtful matching.
Risks associated with Triple Net Lease Loans
Because loans are associated with the term of the lease, a lease break can trigger an immediate call on the loan. If a corporation or franchised business that has signed a lengthy lease goes bankrupt or otherwise needs to reduce the number of locations they are carrying, it can result in a challenge for property owners to meet the immediate obligations of the loan. For this reason, Triple Net Lease loans are most common with lessees that have strong financials and a regional or national footprint.
Types of Lenders Providing Triple Net Lease Financing
When seeking triple-net lease financing, several types of lenders can cater to the unique needs of property owners. Traditional banks and financial institutions are common providers, offering competitive interest rates and established lending terms tailored to low-risk investments. These institutions typically require rigorous underwriting processes, focusing on the creditworthiness of both the property owner and tenants.
Insurance companies are significant players in this market due to their focus on long-term investments and steady cash flows, aligning well with the predictable nature of triple net leases. Real estate investment trusts (REITs) also provide financing solutions, often seeking properties with stable income streams to diversify their portfolios.
Some private equity firms and specialized lending agencies focus solely on real estate, offering more flexible terms and expedited approval processes. These lenders often focus on the property’s potential return on investment, often making them a constructive match for owners aiming to leverage assets.
Role of Commercial Loan Brokers in Sourcing Triple Net Lease Financing
Commercial loan brokers play a crucial role in helping property owners identify and secure the most appropriate triple-net lease financing solutions. With our in-depth knowledge of the financial market and extensive network of lenders, we can match property owners with financing options that best meet their needs and investment goals.
Our personalized guidance throughout the financing process, is built on your goals, such as desired loan terms, interest rates, and potential repayment structures. Our expertise allows us to navigate the complexities of available lenders, significantly reducing the time required on your part to secure funding.
We often have access to exclusive lending opportunities that are not readily available to individual investors, providing a competitive edge in obtaining favorable loan terms. By leveraging our professional relationships and industry insights, we provide tailored financing options, helping you to optimize your investments in the triple-net lease market.
How to Prepare for Triple Net Lease Financing
Preparing for triple net lease financing involves several steps to ensure a smooth and successful application process.
Property owners should conduct a thorough assessment of the property’s financials, including current income streams, operating expenses, and potential for value appreciation. This financial analysis will provide a clear picture of the property’s current performance and future prospects, which is crucial for lenders when considering financing applications.
Next, property owners need to compile comprehensive documentation, such as property appraisals, lease agreements, and tenant credit histories. Maintaining a robust portfolio of these documents will help substantiate the property’s financial stability and appeal to potential lenders. Additionally, improving the property’s value through strategic enhancements or upgrades can make it more attractive to lenders, providing better financing terms.
It is important to evaluate personal financial health, including credit scores and existing debt obligations. Lenders will consider the financial standing of the property owner, so ensuring a solid personal financial foundation can expedite the approval process.
Contact Noble Equity Solutions to Find Financing for Your NNN Deal
Noble Equity Solutions provides financing insights and support in compiling and presenting comprehensive loan applications, increasing the likelihood of securing favorable financing terms. By being well-prepared, property owners can effectively navigate the triple net lease financing landscape and maximize their investment potential.
Triple-net lease financing presents numerous benefits for property owners seeking long-term investment growth. Not only does it provide a stable income stream and reduce management burdens, but it also offers strategic risk mitigation and tax advantages.
Contact Noble Equity Solutions to optimize your financing strategy and to begin the assessment process on your next triple-net lease loan.