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Net Lease Financing

Investing in triple-net lease properties can be an attractive option for those looking to make passive income from real estate. Before you dive in, however, it’s important to understand the complexities of net lease financing, including the tenant’s responsibilities, financing options and terms, financing structure, and more.

Today we’re covering everything you can imagine when it comes to NNN financing. By the time you’re finished reading, you’ll know what you need to do in order to get funding for your next NNN property, with actionable steps.

The Basics of a Net Lease

Net leases are a popular choice in commercial real estate because they shift most (or all) of the property’s operating expenses to the tenant. There are three main types of net leases:

  • Single Net Lease (N): The tenant pays rent and property taxes.
  • Double Net Lease (NN): The tenant pays rent, property taxes, and insurance.
  • Triple Net Lease (NNN): The tenant pays rent, property taxes, insurance, and maintenance costs

NNN leases are the most common for investors because they offer predictable income and minimal landlord responsibilities.

Financing an NNN Lease Property

When you’re looking for a loan to help you finance an NNN lease property, you should focus on some key areas that lenders are certain to care about. These criteria have a big impact on whether or not you’ll be able to get financing. 

Is This a Stable Tenant?

When you invest in a net lease, the rent that your tenant pays you will be covering your payment to the lender – so the lender wants to ensure that the tenant is strong. They’ll look for statistics like sales figures, profit and loss for a trailing year, and their balance sheet.

In an NNN lease, your property is only leased by a single company. This means that you’ll either be at 100% or 0% occupancy, there’s no in between for a single-tenant net lease (aka STNL).

That’s why lenders will look very closely at whether or not your tenant is profitable. They’ll also want to know how much cash and how many liabilities the tenant has. In other words, lenders are concerned with whether or not your tenants will survive a bad month or two in sales.

For some large, popular NNN lease tenants like Dollar General or CVS, this isn’t so much of an issue. But if you’re targeting smaller businesses or clients that aren’t nationwide chains, lenders may have to do more investigation into whether your tenant is viable in the long term.

Is This Property in a Desirable Location?

As any real estate investor knows, location is everything. Lenders will want to ensure that your location is not only well-positioned but also versatile. That’s because there’s always the risk of needing to find a new tenant if the current tenant leaves.

That’s where versatility comes in. Lenders favor versatile properties that can easily be modified and leased to another corporation. Special purpose properties (i.e. those that have only one particular use, like a car wash) will have more obstacles when you’re trying to get financing.

Essentially, your lender is looking at many of the same factors you are when you’re considering if your location is a good investment for an NNN lease. They’ll want to know how much traffic goes by the site each day, what other shops are around to support foot and vehicle traffic, and the accessibility of site ingress and egress.

For example, Chick-fil-A (a very popular NNN lease tenant) strongly prefers locations around shopping centers and on highly trafficked throughways with easy ingress and egress plus enough room for a drive-thru. If you’re handling your NNN lease investment right, you’ve probably got a good location already – you’ll need one in order to attract a high-quality tenant.

Is This a Strong Lease?

A lender will do everything they can to determine how strong the lease you’re looking to invest in is. They’ll ask questions about the rate your tenant is paying, rent bumps, exit clauses, and any other provisions that may be hidden.

When you’re pitching your NNN lease investment to a lender, it’s important to provide a lease summary so that they don’t have to sift through piles of paperwork. And even better, have the info memorized so your potential lender sees how serious you are.

The terms that a lender will offer you depend on a few different considerations. First of all, the lender will be interested in knowing whether you’re working with a credit tenant or a non-credit tenant. A credit tenant is generally either a publicly traded company or one that exceeds a given amount in annual revenue.

For example, Starbucks is a popular, strong NNN lease tenant that is publicly traded on the Nasdaq under the symbol SBUX. Starbucks also has a BBB+ credit rating from Standard and Poor’s, which makes them an investment-grade tenant. For those reasons, Starbucks is a credit tenant.

The lender will also take a look at the length of the lease. Lenders generally don’t like to lend past the lease term, so you should consider that when you look at your financing. For example, if you have a 10-year lease, you will likely struggle to get a 12-year loan. That’s why NNN tenants like CVS, which often sign 20-year leases, can be especially attractive.

Finally, lenders will usually look at the type of tenant you’re renting to. Some tenants are considered riskier than others, depending on their industry or vertical. For example, pharmacies like Walgreens, or Rite Aid are considered more stable than restaurants.

Will You Be Able to Get Financing?

Generally speaking, to qualify for NNN property investing with a commercial mortgage, you’ll need a net worth of $1 million or greater. You may also qualify if you have an annual income over $200,000 (or $300,000 if married and filing jointly). You will need a down payment that’s usually around 30% to 40% of your loan’s total value.

In order to get financing, NNN lease investors generally have to:

  • Meet the net worth or income requirements
  • Have a high credit score
  • Choose a NNN lease tenant with an investment-grade rating or a high-credit company that will guarantee the lease
  • Ensure the lease is long-term and offers sequential rent escalations
  • Ensure your lease is in a prime location for the tenant

Just as it does when you’re buying a home, your credit score has a lot to do with whether you’re qualified to obtain debt.

Once you’re approved to begin the buying process, your financing terms will be based on the loan-to-value (LTV) ratio. That ratio depends on your tenant’s creditworthiness as well as the length and type of your lease, your built-in rent bumps, and the location where you’re renting.

Your lender will also consider what’s called “cash flow related to debt service.” That’s a fancy way of saying that the net operating income (NOI) covers the debt about 1.25 times over. This will ensure you’ll be able to pay back the loan as you promised.

The Financing Process

Financing NNN properties will typically involve either a federally insured bank or credit union, or a private lender. The best loan options usually come from the former (federally insured institutions) as they’re able to offer the most competitive rates and more favorable terms.

Private lenders are generally more expensive to work with. But they can also be more flexible if you’re facing a time crunch or if you’re looking for a temporary financing solution. You can take out what’s called a “private bridge loan” to give you the time you need to negotiate a long-term NNN lease while seeking better financing options.

There’s also the option of non-recourse financing. Non-recourse finance is a type of commercial lending in which the lender is entitled to repayment only from the profits of the project the loan is funding – not from any other assets of the borrower. These loans require substantial collateral but can be a good option to protect any other assets you have.

As long as you meet the lender’s requirements, you should be able to acquire a loan for your NNN lease investment. When you choose a high-quality tenant, you’ll be able to harness your real estate investment as a source of passive income for years to come.

How to Calculate an NNN Lease

Understanding how net lease financing works is key when evaluating an NNN property investment. Let’s break it down using a real-world example Dollar General net lease property in Texas.

NNN Lease Financing Example

Most investors finance NNN properties using a loan, typically with a loan-to-value (LTV) ratio of up to 75%. Assuming an investor secures financing at 70% LTV, they would need to make a 30% down payment:

  • Down Payment (30%): $675,078
  • Loan Amount (70% LTV): $1,575,180

At current 10-year fixed NNN financing rates of 6.55%, the estimated annual debt service (loan repayment) would be around $128,000 per year.

Projected Cash Flow & ROI

Now, let’s calculate the investor’s estimated annual cash flow and return on investment (ROI):

  • Annual NOI: $148,517
  • Annual Debt Service: ~$128,000
  • Net Cash Flow: ~$20,517

To determine the cash-on-cash return (ROI based on the investor’s cash investment):

Cash-on-Cash Return = Net Cash Flow / Down Payment:

$20,517 / $675,078 = 3.04%

Then, once the loan has been paid off after about 16 years, this lease should be putting about $148,517 in the landlord’s pocket…every year. Now that’s consistent income!

And that’s before we’ve even factored in rent increases and lease renegotiations.

Key Takeaways
  • Remember, in a NNN lease, the tenant covers all property expenses, including taxes, insurance, and maintenance. This leaves makes an NNN lease a pretty ideal investment from a landlord’s perspective!
  • With a long-term lease and scheduled rent increases, cash flow is expected to grow over time.
  • Financing terms significantly impact returns—higher LTV ratios can increase leverage but also raise debt obligations

Find Your Next NNN Investment Property

Hopefully, at this point you have a great idea of what net lease financing is, how to calculate your lease payments, and whether or not you’ll be able to get financing.

If you want to find your next (or first) NNN investment property, use our advanced search to find the perfect opportunity for you. You can filter by location, industry, cap rate, price, and more.