Hunting for NNNs
Triple-net leases have their risks, but the biggest
investor challenge is simply getting one.
Your client just sold a small apart- ment building and is weary of the hassles of the landlord experience. While a capital gains hit is looming
(tick-tock), the client sours on lackluster
alternatives like parking the proceeds in
a savings or money market account or
risking it in the stock market.
These dynamics are fueling a surge
in 1031 exchange buyers—both individuals and institutional investors—who are
flocking to triple-net leases (NNN), which
have all the perks and few of the downsides of being a landlord. Under the terms
of triple-net leases, the tenant pays rent,
property taxes, insurance, maintenance,
and overhead; typical lease durations are
25 years. These dynamics, commercial
brokers report, are creating a demand
for exchange properties that they are
struggling to satisfy.
The perceived safety of triple nets
contributes greatly to their appeal.
“Net-lease properties have bondlike
attributes and, as a result, are more connected to the bond market and interest
rates than other types of real estate,”
says Gary Ralston, CCIM, CRE, with
Coldwell Banker Commercial Saunders
Ralston Dantzler Realty in Lakeland, Fla.
It is these bondlike and passive land-
lord attributes that make triple-net leases
appealing destinations for risk-averse
investors—and especially alluring alterna-
tives to 1031 exchange buyers—seeking
to defer taxable income. And, as Ralston
notes, “Leases in excess of a decade in
duration bridge real estate and economic
cycles.” And that’s a highly desirable
sweet spot for many investors.
Jonathan Hipp, founder, president,
and CEO of Calkain Cos. and coauthor
of The Little Book of Triple Net Lease In-
vesting, concurs. “There is a tremendous
amount of capital sitting out there, and
net leases are very attractive when look-
ing at other fixed-income alternatives. A
triple-net lease is really a corporate bond
wrapped in real estate,” says Hipp.
Ralston cites the 1031 buyer as the
biggest influence on the current triple-net
market, in terms of demand and pace,
noting that 1031 buyers must identify
a replacement property within 45 days
of the sale of the relinquished property.
“Net-lease properties are easier and sim-
pler to underwrite,” says Ralston, largely
because the tenant is responsible for
most expenses, including, in many cases,
the roof and the structure of the building.
1031s Driving Cap Rates South
Geoffrey Faulkner, CCIM, managing partner at NNNet Advisors in San Francisco,
observes that cap rates are the lowest
he’s seen in his career. “At the beginning
of the year, everyone was wondering how
they could go any lower, and the last two
quarters, they have,” he says.
“It’s a tale of two property types.
What’s driving cap rates down are the
better credit deals with 10 or more years
on them,” says Faulkner. “These are your
household names—McDonalds, Wells
Fargo, Walgreens. (In general, the higher
the tenant’s credit rating, the lower the cap
rate.) On the other side, deals that maybe
have a bit of hair on them, whether it’s a
lesser credit deal or shorter lease term,
those are trading at a higher premium.”
Faulkner and California brokers are