Mid Atlantic Real Estate Journal — August 30 - September 12, 2013 — A
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M id A tlantic R eal E state J ournal By Jim Slinkard, 1031tax.com The Risk and Reality of NNN Income Properties
N
ew buyers often re- quest a NNN income property with a high
seen and found by its potential customers? Do other national tenants surround the property? When the tenant vacates in 20, 30 or 40 years, can the prop- erty be easily converted to the needs of new potential tenants? Answers to these questions will help determine the strength of a property’s location. Let’s look at ground leases and fee simple income proper- ties. Fee simple property owners enjoy the tax benefit of building depreciation. Ground leased property owners are not able to depreciate their property. How- ever, their tenant builds, pays
for and maintains the property on the landlord’s parcel. The residual building often reverts to the landlordwhen the tenant’s lease expires, yielding great upside for the landlord. Please contact me if you would like to discuss additional pros and cons of ground lease and fee simple properties. NNN property buyers must look at these and other criteria when deciding which NNN property to purchase. I have helped clients purchase and sell investment properties for almost 40 years. It will be my pleasure continued on page 15A
cap rate, high credit tenant and long-term lease. My re- sponse to the buyer is: “How much risk are you willing to take?” Of course every-
Jim Slinkard
one wants the highest possible return when they purchase a NNN income property, but the reality is there’s no free lunch. The greater the cap rate, the greater the risk. I send a daily email of NNN properties tomy clientswith the newest andbestNNNproperties that come to market. The email is concise. It details the tenant, price, cap rate, state, lease type, lease guarantor, years on lease and rent increases. When my client sees a pos- sible match, he or she calls or sends an email requesting a full marketing package that we can review together. Now let’s talk about corporate guaranteed NNN properties versus franchise guaranteed NNN properties. A corporate guaranteed lease has the iden- tical security credit rating and financial strengthas a corporate bond issued by the same parent company. For example, a lease guaranteed by Walgreens or Chase Bank would have the same strength as their corpo- rate bonds. With a franchise guaranteed lease, the backing is normally less strong than a corporate lease. Investors seek a seasoned franchise operator with a consistent track record, sufficient financial strength and additional properties backing the lease. When the franchise guarantee is backed by the per- sonal guarantee of an operator withsolidfinancials, theguaran- tee becomes even stronger. Location, location, location – a quality NNN property is more about location than who guarantees the lease. I tell my clients that it is better to own a property in a great location with an average tenant than a property with a great tenant in an average location. What do the demographics look like? Is there a history of population growth within 1, 3 and 5 miles? Is the property on amajor retail corridor or onapad site adjacent to a Wal-Mart, Home Depot or Safeway? What is the traffic count? Is the property easily
NNN Properties Nationwide
JIM SLINKARD www.1031tax.com 800-454-0015
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