Best NNN Tenants
Is the highest paying renter in a Triple Net lease the best tenant? Not at all. NNN property owners know that the ideal renter is a reliable partner who is financially secure, knows your language, and is dedicated to hard work over the long term.
What is NNN?
Proper use by professional market players, as well as an understanding of the existing features of the application of the concept of a triple net lease, is essential for the further development of the segment.
Conceptually, the meaning of the definition of a triple net lease lies in the name itself. This is the rental rate cleared of the three main types of additional costs – taxes (VAT, land tax, property tax), operating fees, i.e., the cost of maintaining the building, and utility payments.
Which tenants to avoid?
For the beginner, the problem of screening out NNN tenants is usually not a problem. The choice is obvious: the one who pays more and that rents. However, in 95% of cases, pursuing profit at any cost is embarrassing. The high rates a Triple Net lease tenant hardly compensates, concluding a contract with the right to early termination.
However, this is not the main problem of a Triple Net lease’s “richest” tenants. Behind the high (above market) rates often hide an illegal business: gambling clubs, hanging signboard “bookmaker’s office. Or, for example, a network of seafood trade, importing them not entirely legally.
By contacting these tenants, the owner runs the risk of running into visits from law enforcement officials, district governments, and other inspectors. And as soon as those same seafood sellers ask to start working legally, the lease agreement with them will have to be revised, and no one will pay high rates. Well, a network of gambling clubs can close.
The next category of “rich tenants” – are companies taking over the market. Such tenants need to occupy the best premises in the capital urgently. They do not count on the costs. To take deductions at high prices and in a year to review the NNN lease agreement – this is the strategy of taking over the market of all the leading retail chains.
Best NNN Tenants
When selecting a tenant, one should first consider the property offered for lease: its location, the prospect of the potential tenant’s industry, etc. If the place is in demand, and the premises have a convenient entrance group and dense pedestrian traffic, tenants willing to pay higher rents can be considered.
If the premises are specific, which does not allow you to find a tenant quickly, for example, an industrial one, then you must first look for tenants who are prepared to conclude a long-term lease agreement. At the same time, it would not be superfluous to provide for penalties in the event of early termination of the contract. In any case, you should remember that a large chain tenant is always more reliable than a small business in the same industry. But the former also wants to pay less for rent, knowing it is forming a stable rental flow.
What should be necessary for the owner of the premises? It is the tenant’s business’s stability, reliability, predictability, and transparency.
A reliable tenant a Triple Net lease:
it is stable in the market and has a good profit;
if the location of the room is profitable for him, he is unlikely to leave it or ask for too great a discount;
an open company;
it is ideal for the owner to be able to see the tenant’s financial indicators;
the main issues of local business are handled in the local office;
a big problem for the owner of the premises is a manager who is abroad, does not know the local specifics, and responds to the owner’s letters with a month’s delay.
The owner must know how to select tenants. The proper selection will ensure a low vacancy rate and stable customer traffic. Retail outlets should complement each other’s assortment range and not compete.
According to statistics, grocery chains are the best tenants in a Triple Net lease. This business is the most resistant to the “turbulence” of the economy. Food will always be in demand among customers. Large food chains are constantly increasing the amount of leased retail space. Even during the crisis, the profits of food giants are still growing.
Fast food chains should also be included in rating the best tenants in a Triple Net lease. The popularity of tasty and democratic food is only growing, so the leading fast-food chains are also increasing. The top three tenants are McDonald’s, Burger King, and KFC.
McDonald’s excellent economic performance is also reflected in the rental rates the chain is willing to pay. This fact speaks, among other things, to the company’s margin of safety. Fast food market players, in general, do not react too strongly to the economic turmoil in the country.
Fast food is popular and attractive. If any public catering outlets are leaving their settled place, where there were McDonald’s, Burger King, or KFC, be sure to determine another company that sells fast food. The room will not be empty.
In third place in the ranking of the best tenants is a Triple Net lease – state banks (banks with state participation). Real estate leased by a bank must meet the specific requirements of credit institutions. In recent years, banks have been reducing the number of physical offices, preferring the development of online. Nevertheless, we are not yet discussing a severe state shutdown of bank networks. Also, banks’ business with state participation is stable in any crisis.
What to do when the market changes?
The main thing is to keep a close eye on the situation and the behavior of the other market participants. For example, during the pandemic, landlords who agreed to make concessions to business and make a discount or deferral of rent won in the end.
During the toughest lockdown, those who allowed tenants to work for a percentage of turnover continued to receive at least some profit and kept tenants, who, after some time, began to pay the total price again. On the other hand, those who initially insisted on total price lost tenants and had several months of downtime – current tenants had to leave them, and it was challenging to find new ones amid the pandemic.