• Kirill Perelyguine

Triple net commercial real estate investments

Updated: 3 days ago

Triple net commercial real estate investments


A diamond in the rough/a hidden investment

secret?


A lot have been said about different levels of uncertainty in the Canadian real estate

markets over the past couple of years and how “bubbly” their current state is. Topping it all

up is the Canadian GDP modest growth forecast by several experts, such as Oxford

Economics and Deloitte, which could be the reason for increasing numbers of pessimists

and optimists alike to look for a higher than usual levels of security in their investment

portfolio.


Choosing and adding another property to an investment portfolio requires taking several

factors in consideration: financial security, liquidity, long term stability etc. Many of these

factors/aspects meet in an often overlooked type of commercial investment property: single

tenant Triple Net property. Visually, that would be your single-tenant retail property in a

freestanding one-story building occupied by Burger Place, Coffee Shop, Furniture or

Electronics big box store. In some cases this type of the property is owned by the tenant,

however, there are plenty of opportunities when the property is owned by an investor and is

a part of a balanced portfolio.


This type of commercial real estate investment property could be a perfect fit for several types of investors: low risk oriented; looking for hands-off investment; looking for stable and long-term income flow, or just starting in commercial property investment.




Let’s take a look at what is making Triple Net investment properties so attractive for the investor looking to have as little involvement as possible:


  1. First, is the type of the commercial lease agreement that the tenant has signed - Triple Net means that the tenant is responsible for their proportionate amount of the property tax maintenance and insurance, sometimes even the major structural repairs to the property. In the case of a single tenant property the tenant usually pays for all of the costs associated with the investment property, leaving the landlord with the “clean” net amount of rent, which makes it much easier to calculate cash flow and make long-term financial projections.

  2. Second, it is the length of the lease, often 10 to 20 years, with an option to renew for another 10-20 years. The length of the lease is caused by the interest of the tenant to create their presence in certain neighbourhood and secure it there for years to come. From the investor’s perspective, taking the “vacancy” out of the pro-forma means adding couple of dollars to the net operating income. Moreover, the solid corporate franchise tenant profile would usually allow for more favorable terms of financing, as the lending industry views these tenants as a lower risk, thus, allowing some breathing room for the mortgagee. One of the strategies to try when buying such property with a financial institution as a tenant, is to approach the tenant for the financing – this will achieve two things: it will first serve as a “litmus test”, in a sense that if a lease renewal coming up in several years and the bank would not finance a property that they themselves are occupying, that might tell the buyer that the bank is planning to leave this location at the lease renewal, making the investment not that great overall. However, if the bank does provide the financing, the buyer has a chance on negotiating a lower than market rate on their mortgage and enjoy a higher return than initially planned.

All of the above would definitely add a desired option for an investment portfolio. However,

there are still several flaws in this shiny “picture-perfect” investment type that an investor

would need to take into consideration when considering this type of investment property:

Firstly, in terms of the lease for the property, keeping in mind that there is often a large

corporation with its own legal departments, the importance of the lawyers help during the

due diligence investigations or contract preparation is of utmost importance, as such items

as roof repair, parking lot repaving etc might or might not be included in the lease

agreement. The balancing act between a landlord looking to maximize the net stream of

income and the tenant trying hard to minimize its responsibilities under the lease

agreement needs to be investigated thoroughly.


Secondly, given the relative security of the investment, these properties tend to sell at a

lower cap rate thus higher prices than similarly performing other investment properties.

Finally, even though, the ideal picture is looking like a no management, lazy investment,

the tenant is usually responsible for the maintenance of the property and ideally should be

using a professional property management company; the landlord still needs to monitor the

quality of maintenance to avoid neglect by the tenant and property manager. As the

Landlord still usually responsible for structural elements of the building items as the roof,

HVAC and foundation and neglect of the A/C system by the tenant would cause the

landlord to incur a major expenditure ahead of the scheduled replacement.

As with any type of investment, there are pro’s and con’s associated with the Triple Net

investment properties, however, if threaded with caution, the benefits of this type of

investment might outweigh the negative aspects in the long run, especially, if hands-off,

long term investment is favoured.

Credits to:


Kirill Perelyguine is a Broker with Royal LePage Real Estate Services in Toronto, specializing in commercial investment properties and land development. Contact him at kp@invsty.com


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