What are the negatives of investing in NNN leases?

Any solutions to overcome potential problems or challenges?
In Buying Property - Asked by Scott F. - May 26, 2009
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Answer(s)

Mike F.
Broker/Agent
Atlanta, GA

Loosing your tenant is the main downside -- many NNN leases are for specialty use buildings that are hard to re-lease if the current tenant goes out of business. Be very careful to check the credit of the tenant as well as the long term viablility of the tenant's business.

May 27, 2009
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Paul S.
Broker/Agent
Glendora, CA

Big question. One of the biggest risks is what happens if you lose the tenant? Often times with a NNN you are buying cash flow and the actual value of the real estate is much less without the cash flow. As the market changes so do the rents and so do the prices. If you lose a tenant, and the market rents have gone down, your replacement tenant could be paying much less than the original tenant. That doesn't necessarily mean the original tenant is off the hook for the difference. However, if the original tenant files bankruptcy and disappears you probably lose? Usually a landlord is considered an unsecured creditor in a bankruptcy (check with a lawyer) and will get little or nothing. The strength of the tenant is very important. The greater the relative strength of the tenant, generally speaking, the lower the cap rate. A low cap translates to a higher price relative to the cash flow the property produces. Walgeen's is a prime example. Cap rates were running at 6.5% not too long ago for a Walgreen's with no rent increases for 25 years (consider what inflation alone would do to your equity position). Walgreen's are the golden boys of the pharmacy world and could command a high price relative to the income because of their perceived strength. However, a few short years ago you would have thought that Circuit City, Mervyn's etc. were strong and now they are gone. Now giants like GM and Chrysler are in trouble. If you had one of them as a tenant you may very well be re-leasing the space at a lower rent than they were at. If caps remained the same (which they have not) your equity would have deminished because of the lower rent. Furter evaporation would have occurred because caps have in fact gone up recently. There are many other factors to look at when buying a NNN like, location, age, demographics, financials,etc., etc.
All that said there are a lot of good reasons for investing in NNN's. You asked for some bad which I haven't covered 100%. If you would like more info call me at 800 554-7362 ext. 208 or e-mail me at paulsylvester@remax.net
Paul Sylvester, CCIM

May 27, 2009
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