NNN 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 NNN lease financing, including the tenant’s responsibilities, financing options and terms, financing structure, and more. 

In this comprehensive guide, we’ll cover everything you need to know about financing a NNN property. By the time you’re finished reading, you’ll have a greater understanding of what you need to do in order to get funding for your next NNN property. These investments can yield strong returns – and getting the right financing can be part of ensuring a healthy income. 

NNN Lease Overview

Before we discuss funding options, it’s crucial to have a grasp on the different types of commercial leases, including gross leases and net leases. For commercial real estate investors, net leases come with a host of additional benefits that set them apart from their counterparts, gross leases. 

A gross lease usually involves a predetermined amount that a tenant pays to use a space. That amount does not change based on operating expenses, as landlords generally cover operating costs. Net leases, on the other hand, are beneficial to landlords because they allow them to hand operating expenses off to their tenants. 

There are three tiers of net leases: single, double, and triple. They’re also called N, NN, and NNN leases. Each increasing level allows the landlord to pass more and more expenses onto the tenant, absolving the landlord of increased risk as the tiers increase. 

Single net leases, or N leases, pass property taxes over to the tenant (in addition to the cost of rent), but the landlord remains responsible for insurance, maintenance, repairs, and utilities. N leases are less common when it comes to commercial real estate. Double net leases, also called NN leases, and triple net leases, also called NNN leases, are seen much more frequently. 

In this article, we’ll be focusing exclusively on triple net lease financing, which is generally focused on properties that have only one tenant. This tenant will be responsible for paying all of the operating expenses related to the property, including real estate taxes, building insurance, and maintenance costs. 

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. 

Tenant Stability

Essentially, 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. 

Lenders will examine 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 Starbucks 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. 

Location

As all NNN lease investors know, location is everything. Lenders will want to ensure that your location is not only well-positioned but also versatile. That’s because there is always the risk of re-tenanting. In other words, the lender wants to know what will happen if your tenant leaves. 

That’s where versatility comes in. Lenders favor versatile properties that can easily be modified and leased to another user. 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 like 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 the best NNN lease tenants, these factors are crucial anyway. For instance, 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. 

Lease Information

Predictably, lenders will be extremely focused on how strong the lease 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. 

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. Chick-fil-a is also a credit tenant. While the company is privately held, it’s profitable and has shown strong sales and growth over the years. 

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 lease tenants like CVS, which often signs a 20-year lease, can be especially attractive. 

Finally, lenders will 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 $ 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: 

1. Meet the net worth or income requirements

2. Have a high credit score

3. Choose a NNN lease tenant with an investment-grade rating or a high-credit company that will guarantee the lease

4. Ensure the lease is long-term and offers sequential rent escalations

5. Select a prime location for an NNN 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. 

As of January 2023, the average NNN lease financing rates are clocking in at around 5.23% for five-year fixed-rate loans, 5.2% for seven-year fixed-rate loans, and 5.17% for 10-year fixed-rate loans. Single-tenant loans are often available for up to 75% LTV. 

There’s also the option of NNN 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

While calculating the rate of an NNN lease may look complicated at first, it’s actually very simple. You’ll need to calculate the base amount, then find the NNN amount, then add those values together. For instance, you might see a NNN lease advertised like so: 

Lease Rate: $50/sq. ft. NNN, Property: 2,000 sq. ft., NNN: $5

To calculate the base amount, you multiply the lease rate by the square footage to get the annual base amount: $50 x 2,000 = $100,000. Then, you divide that value by 12 to get the monthly base amount: $100,000 / 12 = $8,333.

For the NNN amount, you’ll multiply the NNN by the square footage. The NNN was advertised as $5, so you’ll do $5 x 2,000 to get $10,000. Again, divide that by 12 to get the monthly NNN amount—$10,000 / 12 = $833. 

Next, add up the monthly base amount and the monthly NNN amount to get the total monthly amount your tenant will pay. In this case, it would be $8,333 + $833, which equals a total of $9,166 per month. 

NNN Lease Financing Rates

As of January 2023, NNN lease interest rates typically range from 4.75% to 5.50%. These rates are for leases with terms from 20 to 30 years. For shorter-term loans, the financing rates are slightly higher, ranging from an average of 5.23% for a five-year loan to an average of 5.17% for a 10-year loan. 

What is NNN Non-Recourse Financing?

NNN non-recourse financing is a type of commercial lending that entitles the lender to repayment from only the profits of the project the loan is funding and not from any other assets held by the borrower. These loans are generally secured by collateral in the form of the commercial real estate investment space. 

Non-recourse financing offers additional security to the borrower. It’s the opposite of a recourse loan, which allows the lender to pursue additional assets should a borrower default on a loan if the debt’s balance is higher than the value of the existing collateral. 

While it’s not advisable to default on any loan, non-recourse financing can protect your other assets if that situation does occur. 

Find Your Next NNN Investment Property

Hopefully, this article has given you a better idea of what NNN lease financing is, how to calculate your lease payments, and whether or not you’ll be able to get financing. 

If you want to look for your next NNN investment property, use our deal finder to find the best option for you. You can filter by location, industry, cap rate, price, and more.