Pifalls Of NNN Properties?
Hey Gang,
Can anyone list the top 5 drawbacks to owning a stand alone, triple net property in another state? A few opportunities are looking good to me, and I can't think of any negatives. They must exist. Help!!
Thanks in advance.
MarleneM 
damage control and collecting.......kenmax
Thanks for your help.
Hmmm. Collecting. What if I rent to a big chain company like Blockbuster or Outback Steakhouse --- and the check doesn't arrive on time? What recourse do I have against such large companies?
Gratefully,
MarleneM :-?
What about evictions??? How does one get a big company like that to leave? How much do commercial evictions cost?
And damage control.
Don't triple net leases require a security deposit? Is it one month's rent or more?
Seems something could be put into the lease to cover this issue, and if the tenant isn't maintaining the building, etc. What do people normally do to protect themselves from damages?
Thanks again,
MarleneM
damage control- the deposit does not always cover the amount of damage. you then can sue to recover but most of the time a lawyer will cost more than the amount you will receive in return. you can come out even or ahead if you personaly go to small claims.
[ Edited by kenmax on Date 07/18/2004 ]collecting or evict. is the same as with in renter the only difference is big companies do have lawyers {some have them on the payrole} and have deep pockets and can wear you down $$ly......kenmax[ Edited by kenmax on Date 07/18/2004 ]
The biggest negative, IMHO, are the low returns. To get a good credit-worthy tenant you're generally looking a cap rates below 8%, sometimes substantially below that. Of course, to some investors, it may be worth taking the lower returns in exchange for not having to put up with any of the day-to-day hassles of property management.
The other negative is that these buildings are often special purpose buildings. So at the end of the lease period you own a building that may be difficult to re-lease, or need lots of expensive remodeling in order to make it marketable.
That doesn't mean you shouldn't do an NNN deal. They may not be for everyone, but they have their advantages. You probably know those already, since you only asked about the downsides.
CT
CK is absolutely right to bring up the interest rate risk. I didn't mention it because I assumed you would hold the lease until the end, but if you don't, you could definitely run the risk of taking a hit because interest rates may have risen from where they are now, which is pretty low.
And, even if you think you are going to hold the lease to the end, things have a way of changing. Some emergency comes up, totally unexpected, and it's a different world suddenly. That's something else to keep in mind.
CT
I've looked at some of these also, no way I would buy at current cap rates. On a credit worthy tenant, default risk is low, biggest thing for me is interest rate risk, low interest rates have driven caps (historically ~9%) down to 6.75-7.5% on credit worthy tenants. That Walgreens you may be able to find at $4m 7% cap, at a 8% cap is worth $500k less at a 8% cap. It takes ~$300-500k on get in on zero coupon deals like this.
Some of the more attractive ones, usually resturants, are not coporate backed. There are decent deals on Denny's and Sonic's out there... I've came very close on a out of state Sonic before, but building has limited use for other tenants. A family member has a contract to construct Dollar Generals in VA, so I may get in on some of those, only if sig above market caps.
Thanks for all the great answers!
I'm being told of a building where CAP rate is 9-10%, building is about 15 years old, but mostly in a tourist area. I plan on reviewing the lease very carefully (rented on a 5 year lease with two 5 year renewals.)
What other questions should I ask of the agent?