Triple Net Lease Property: What is Involved with Due Diligence?
You are excited about finding the perfect triple net lease for sale and want to move quickly. Fortunately, the “due diligence” period provides time for investors to do all they can to make sure their investment is a good one. Most NNN investments include a 30-day period that begins after the purchase contract has been executed. But what should you do during that time?
The Due Diligence Process
Are you ready for the responsibilities of property investment? Triple net leases are popular for the stable, passive income they can provide. But if things go wrong, you are still the investor with financial responsibilities to meet. The due diligence process allows an investor to complete four important steps before the sale is final:
- Examine all features of the loan
- Examine the seller’s records
- Physical inspection of the property
- Review the title reports and property lease
At the end of the due diligence period, a buyer can either complete the sale and close the contract or cancel the sale and get their earnest money back.
If you’re borrowing money to purchase a triple net lease for sale, a broker can help you decide which type of loan is best for a specific property. Comparing the interest rate, fees, loan amount, and loan terms against the projected income of the NNN investment will confirm whether or not the loan makes sense. If not, you might consider other ways to pay for the property or decide to cancel the investment altogether.
Examining the seller’s books and records is the best way to learn about the past income of the property as well as the past expenses. Ask to see records going back for three years or more. By looking at the books you can get a clear understanding of the sales history of all present tenants and their responsibilities in paying for property expenses.
Since most of the expenses involved with NNN are the responsibility of the tenant, it’s appropriate to focus some of your efforts in this category on the tenant(s).
Low turnover is one of the hallmarks of a NNN property, but that doesn’t mean you can assume every occupant will complete a long-term lease. When selecting a new tenant you have the option of a local, regional or national company.
National tenants may seem like the best choice initially, and in many cases they are. Many—but not all—national companies are well-established with good credit ratings, brand recognition, and corporate backing to bail them out if needed. But if a national company files bankruptcy, there’s no guarantee your lease agreement will be honored.
Local and regional tenants are more likely to have roots in the community. But they are more vulnerable to the fluctuation of the economy, putting them at a higher risk of default.
To complete your due diligence, do your research on the individual tenants. Don’t assume a national company is reputable and has a good credit rating. Don’t assume the personal guarantee of a local retailer is valid.
Looking at a photo of the property isn’t enough. Depending on the building, its location, and the types of tenants, you may need the expert opinion of a professional inspection engineer. At the very least, inspecting the HVAC system, the parking lot, roof, and general structure is necessary.
Compliance with all codes related to the Disability Act, Environmental Protection Agency, and municipal regulations that could impact the operation of the business is crucial.
Because tenants in a triple net lease property are responsible for their own upgrades and remodeling, the current property owner might not have an accurate record of whether all aspects of the building are up to code and if the systems are working well.
It’s not uncommon for NNN property owners to live outside of the area where their property is located. That means it’s possible the seller hasn’t seen the building for months or even years.
Don’t simply take the word of the seller, no matter how trustworthy they might seem. Have the building inspected by the appropriate compliance officers and engineers to be certain it is in top condition.
Property Lease & Title Report
In addition to viewing the terms of the lease, it’s valuable to order a title report and survey. These extra documents will reveal any easements or restrictions the seller may have forgotten to mention. Knowing the exact lot size, property setbacks and building footprint gives you more information to consider before making a final decision.
Work with a Broker to Find a Triple Net Lease for Sale
One way to simplify the entire process of purchasing a NNN lease property is to enlist the help of Net Lease World. By working with an established broker, you can search for high-quality investment properties across the country. They have experience in vetting properties and in conducting all the recommended steps of due diligence.
« Previous Next »