Considerations when purchasing Net Leased (NNN) Real Estate in Florida
If you’re considering purchasing a Net Leased, or NNN Property, in Florida, you’re not alone. In recent years a large numbers of Buyers looking to either complete a 1031 exchange, or invest in something that has little to no management responsibilities, have piled into the Florida Net Leased marketplace. The most common reason I hear from investors wanting to park money down here, is because Florida does not have a state income tax. While I certainly get the appeal of a Net Leased property, they are certainly not created equal. Let’s dig into a few of the things I look for when working with a NNN Buyer. I don’t want to just focus on the current Lease and Tenant, I want you to assume that the existing Tenant will vacate and you will have to fill the space again.
First of all, just because it says zero landlord responsibilities on the listing, doesn’t make it so. You need to read the Lease, better yet, you need to have your attorney review the Lease! Aside from providing a clear Lease Abstract, you’ll really want to know who is responsible for the roof and structure. It’s not at all uncommon for a Net Leased Property to have in the Lease that the Landlord is responsible for the roof and structure. This means your inspection report becomes all that much more important if you’re the Buyer.
When you’re buying a Net Leased property, a lot of people fall for the trick of focusing on the cap rate, don’t do that. Before you’re buying anything else, you’re buying a piece of real estate, the Lease just comes along with it. Remove cap rate from the property, take a look at it, would you buy the Real Estate? Is it well located? Is it on a hard corner, or somewhere mid block where people have to do a U turn to get into your property? If your current Tenant leaves the space, will another Tenant see themselves in it? If you’re location is terrible, the answer is probably not.
Would you rather own a property that 10,000 cars drive past daily, or 2,000 cars drive past? Don’t ignore traffic counts, for a number of reasons. Again, let’s assume your current Tenant vacates. One of the first things a prospective incoming Tenant is going to ask is, what’s the traffic count? It should go without saying, but I’ll say it, if nobody drives by the property, there aren’t many businesses that are going to want to come in and Lease your space.
Did you know that every single National Tenant I can think of has income and population data they focus on during site selection? The lower the area income, and the lower the population, the fewer companies there are to Lease your space. It makes sense right? If nobody lives around your site, and there’s little to no disposable income in the area, it’s going to be harder to Lease out again if your existing Tenant vacates. You’d be surprised how many NNN first time investors fall into this trap.
Lastly, let’s ask, how far above or below fair market is your Lease. Let’s say that in a given area market rental rates are $25 NNN. You’re looking at a long term Tenants Lease who has been there for 15 years. They’ve been paying 3% rental increases yearly, they are now paying $50 NNN, and that’s the cash flow you’re looking to buy. Well, hold on, what happens when they don’t renew? We know market rate is $25 NNN, so you’re likely looking at a deal that is priced double what it should be. The should be is argumentative. There are legacy locations where a Tenant won’t leave because it’s a high producing store. That aside, do you see the point I’m making here? The farther above the going rate your existing Tenants Lease is for, the riskier the Property is for a new Buyer. Conversely, if the Lease rate is $20 NNN and the area is trading at $25 NNN, you should be able to push the purchase price down and have room to the upside. To be fair, this scenario isn’t happening a lot in the market right now.
Want to talk more about Net Leased Properties in Florida? Let’s talk, give me a call (786)443-7203 or email me Casey@caseycre.com
