How do you find and evaluate potential tenants for a triple net lease?

Prior to identification of your target market, an investor must decide its investment strategy. To suggest a triple net lease means a lower return is to assume that the tail wags the dog. The covenant (credit risk), growth rate and lease term (length and security of income) will vary even among similar use classes and business types. The key is to decide how hands on the investor is willing to be, and if income return / stability is prioritised over capital value. This may depend on the structure of the holding entity. A general rule of thumb is more risk is equal to more reward across a similar time horizon. This means that a triple net lease for a tech start up is not equivalent to an established tech business even at the same rent.

Owner's - Make certain you engage with a reputable leasing agent, and that they operate under a solid agreement requiring them to defend and indemnify you for negligence. The agreement should also require them to maintain Professional Liability (Errors & Omission) with no exclusions for Tenant Discrimination type claims. A leasing agent can inadvertantly get an owner into various types of lawsuits not covered by a typical insurance policy carried by an owner. Therefore a solid agreement with insurance and indemnity provisions helps protect against third party (tenant/prospective tenant) lawsuits which you have no insurance for.

Owner's - Be aware that certain tenant operations will have an adverse impact on your cost of insurance, and in some cases even insurability. So take into consideration how these costs, or ability to insure factor into the terms and conditions you build into the lease agreement, including how much you charge them in rent!

Owner's - In terms of a lease's Insurance and Indemnity/Hold Harmless language the AIR Single Tenant or NNN lease forms are excellent benchmark's which have been vetted and tested for years. Also, using a Risk Manager that specializes in the Real Estate vertical can help review leases and proposed changes by Tenants to help understand if they are acceptable and/or "Market".

Triple Net is somewhat rare but it can bring risks and benefits to the owner Things for property owner to consider: Lower operating costs because the Tenant(s) is directly responsible for building insurance, property taxes and property maintenance. Owners “give up” control . Tenant(s) can hire cheap maintenance workers over quality ones. Tenant(s) are responsible for the building’s condition they’ll take more precautions.If tenant(s) doesn’t pay property taxes building owner is responsible. Triple N can free up owners time and money to focus on other ventures. In some cases NNN can give owner more bargaining power when seeking a mortgage loan.

Triple N agreement can bring risks and rewards to the tenant. Here’s a few things to consider: The tenant pays the building’s taxes, insurance and maintenance costs in exchange for lower rent. The landlord may overestimate operating costs thus changing higher rent. Since the tenant is responsible for paying building insurance they can select a cheaper carrier. If the tenant is in a long term lease this could prevent rent increases. The tenant will have to give up time and effort to act as a unofficial property manager to tend to the repairs and operational expenses. In addition, they’ll be “on call” to handle any unforeseen problems.