WHAT FACTORS ARE MOST IMPORTANT TO TRIPLE NET (NNN) FINANCING?

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Financing triple-net (NNN) properties is a specialty within commercial real estate lending. Personal financial and credit qualification are assessed for each borrower, but there are specific property qualification factors that HARBORWEST recommends our investors consider when pre-screening potential NNN investment properties:

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• TENANCY. Your primary question should be, who is the tenant? You are not purchasing a property, you are purchasing a leased income stream that is collateralized by a property. The tenant’s financial health to uphold that lease agreement is the most important factor to lenders. Tenants are more desirable if they are larger, higher investment grade, with strong store sales history or public financials. Larger tenants will also have more data for lenders to assess. “Mom n’ pop” tenants and non-credit tenants usually fall into a different lending bucket than the types of tenants described herein.

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• OPERATOR. Your next question should be, is this a corporate guaranty or a franchisee tenant? Corporate guarantees are always preferable and carry more strength. If the tenant is a franchisee, you’ll want to investigate how many locations the franchisee operates, where those locations are in respect to the subject property, and how long they’ve been in business. You’ll want to ask if the lease specifies that tenant financials and store sales are to be made available upon request, and if there is a personal guaranty from the franchisee.

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• LEASE TERM. How long is the remaining lease term? Marketing can be misleading, as the remaining term in the current lease period is different than the potential lease term if options are exercised. Tenants are not lease responsible to accept any option period. A vacant (dark) property seriously escalates the risk of loan default, so lenders prefer their loan term to expire prior to the lease term or be co-terminous with the lease. In general, the longer the lease, the more attractive loan terms will be offered. Typically (7+) years remaining is the hinge point for the most competitive loan programs.

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• COLLATERAL. This is the most overlooked and misunderstood factor. You’ll want to verify upfront if the property is Fee Simple (own the land and building), Leased Fee (own the land / ground lease), or Leasehold (own the building, but not the land). Most listing are fee simple and accepted by all lenders, Leased Fee (ground lease) properties are less desirable but still lendable, and Leasehold properties are more difficult to finance with minimal options. If a listing is a ground lease, typically with triple-net properties on long-term leases, the building ownership will revert to the ground lessor should the tenant vacate.

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• INCOME. Each individual property will have a net operating income (NOI) which is the net income due to the investor after all expenses are paid. The lease structure will determine this number and is used as the basis for all lender calculations. Each lender will have their own unique underwriting guidelines to determine the required down payment, maximum loan amount or loan-to-value (LTV), and subsequent lease terms including the interest rate. In general, the higher the capitalization rate (“cap rate”) and net operating income (NOI), the stronger the cash flow which equates to better interest rates and higher available LTV’s.

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• LOCATION. The last, but equally as important, factor when evaluating a NNN property for eligible financing is the location. Typically, a listing will note population size within a 1-mile, 5-mile, 10-mile and 25-mile radius. Properties located in more populated areas and larger MSA’s (metropolitan statistical area) are more desirable to lenders as the retail tenant will see higher customer traffic. The 5-mile figure is most referenced, with most lenders wants to see 10,000 or more people within that radius.