After analyzing the NNN property lease, the next factor to evaluate is the tenant’s business conditions.
A lot of information is available to understand the financial strength of a tenant. If it is a public company, the credit rating can be a starting point, from online sites like http://www.freeedgar.com/, http://www.zacks.com/ & http://www.companysleuth.com/, etc.
Credit ratings represent the likelihood of a company defaulting on its financial obligations. Perhaps the most important factor when considering a Triple Net NNN property investment is the credit quality of the tenant – which is largely attributable to the tenant’s ability to pay rent over the course of its NNN property lease (NNN expert advisors ). In general, for NNN lease properties, a good choice is a nationally recognized tenant with little or no debt, or, with an investment-grade (BBB- or better) credit rating from one of the three major credit rating agencies – Moody’s, Zack’s, or S&P.
Regardless, of the tenant being a public or privately held company, consumers and clients want and expect consistency in services or products from an NNN property tenant’s business, which if done right translates into revenue and profit “stability” or high credit ratings. Let’s examine in-depth considerations when first evaluating a tenant’s business, which can often be a franchise situation:
Support & Training: Look for a support and training system for the tenant that is comprehensive and has done away with any outdated procedures. Also, speak with the other franchise owners in the system and get perspective. These owners are a valuable resource and can expose the real risks faced by your prospective tenants.
Track Record: Research the officers and management of the business, tenant and, parent, along with some insight into the business operating culture(1031 NNN exchange). Look for stability and experience, as a business is competitive and you want the best team as your partner. (All franchises must file a Franchise Disclosure Document (FDD) with their complete business details so you can begin your research. Articles 1-2-3 provide franchise ownership history, ligation, and bankruptcy information.)
Financials: Review these, question them, and have a CPA evaluate them as well. (Article 21 of the FDD contains a franchise’s financial statements.)
Capital Committed: Evaluate liquid capital, working capital, cash, receivables, liabilities, etc. of the business. If a business is undercapitalized, it will more likely fail.
Industry/Market: Is the defined market niche trending well? Is that industry in growth mode or is it in decline? Understanding with complete certainty the micro and macrocosm of the business helps to determine the viability, and ultimately the profitability, of the success of the business. (Franchise companies are redefining their metrics when carving out a territory- this is covered in article 12 of the FDD)
Royalties: The tenant should be making money on any royalties, not by providing owners with “other” services. Many of these other services are to third-party vendors and constitute a pass-along expense. A number of businesses will reward their owners with a sliding royalty scale based on revenue: the more you earn, the less royalty paid. Also, look at minimum royalty payments and see if they’re enforced. (Check article 6 of the FDD carefully.)
Call your trusted expert advisors at Triple Net Investment Group for the safest and unbiased advice for your first or next NNN property or 1031 NNN exchange, today.
