The key to success with a triple net lease property investment is locating (and keeping) the right tenant. The best tenant will be the one for whom the property is an excellent fit and who provides the right cash flow and security for the investor.
Based on credit worthiness (which may be determined with the help of Standard & Poor’s index or Moody’s reporting) and other factors, tenants may execute a short- or long-term lease and they may or may not accept periodic rent escalation clauses as a part of their lease agreement. A very stable tenant such as CVS or Walgreens may execute a 20- or 25-year lease but not agree to any increases in rent during that time. A local “mom and pop” restaurant may only execute a 5-year lease but may agree to steep rent increases each year. Whether the investor prefers to seek long term stability at a lower cash-on-cash return, or a short lease term with a larger cash flow, depends on how the investor seeks to enhance his property portfolio. The answer may well lie somewhere in between.
The location of the property, it’s size, shape, and configuration will greatly determine what type of tenant would thrive in the property. Location of the property will also determine what type of tenant is appropriate. For example, neither McDonalds nor Walgreens would likely be interested in a property that is not in a visible, high-traffic location, or one that was not in a clean and sanitary and well-maintained.
In addition to obtaining the potential tenant’s commercial credit rating, the investor should obtain and review the tenants audited financial statements, banking and financial records and references, and tax returns for both the business and its owners for the last five years. Sales data, inventory reports, income statements, and cash flow reports should also be requested and reviewed. Finally, the investor should request, investigate, and review any required licenses or certifications the tenant may require to operate as well as liability and other insurance data.
The investor should consult with a real estate and legal professionals to help determine what other information may be required to determine the suitability of a potential tenant. The ultimate value of any triple net lease investment property lies with the tenant and the associated lease agreement, and the investor must proceed accordingly when making this important determination.
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