Why NNN Investors Prefer California State: Higher Growth & Competitive Cap Rates Explained
Future Holding for NNN Property Investments in California
Triple Net Lease (NNN) properties, where tenants are responsible for property taxes, insurance, and maintenance, continue to be a popular investment choice due to their passive nature and reliable income stream. In California, the outlook for NNN property investments remains strong, supported by several key market dynamics:
1. Economic and Population Growth
California boasts the largest economy in the United States, driven by robust sectors such as technology, entertainment, logistics, and agriculture. Despite a slight population decline in recent years, key metropolitan areas like Los Angeles, San Diego, San Francisco Bay Area, and Sacramento continue to attract businesses and talent. This economic vitality underpins demand for retail, industrial, and service-based commercial spaces—making the state fertile ground for NNN investment opportunities.
2. Stability and Demand for NNN Properties
NNN lease investments offer California investors a dependable income stream with reduced landlord responsibilities. In high-demand cities such as San Jose, Irvine, and Pasadena, essential businesses like pharmacies, auto parts stores, and quick-service restaurants continue to thrive. The long-term lease structures and corporate-guaranteed rents typical of these properties appeal to both seasoned and new investors seeking predictable returns in a high-cost state.
3. Market Trends and Cap Rates
While California typically experiences lower cap rates due to high property values and investor competition, the state has seen slight upward movement in cap rates amid rising interest rates—improving yield potential for investors. Markets like the Inland Empire, Central Valley, and Northern California now offer more favorable cap rates (generally ranging from 5.0%–6.5%) compared to prime coastal cities, providing a wider array of opportunities for those seeking better returns.
4. Financing Considerations for NNN Investors
Investing in California’s NNN market often requires a high financial threshold due to elevated property prices. Investors typically need a net worth exceeding $1 million or an annual income above $200,000 to qualify for financing. Down payments generally range from 30% to 40%, and lenders often look for well-located assets with national tenants and long-term leases. Understanding regional market dynamics and securing competitive financing terms is critical for success in the state’s NNN space.
5. Local Market Opportunities
California offers a broad spectrum of NNN investment opportunities—from high-traffic retail spaces in urban centers to logistics and industrial properties in inland regions. For example, a single-tenant retail asset leased to a national pharmacy chain in Orange County offers a 10-year NNN lease with 2% annual escalations—making it ideal for investors using a 1031 exchange to defer capital gains while securing consistent income. Additionally, California’s emphasis on sustainable development and EV infrastructure is opening new avenues for NNN investments in sectors like clean energy retail and charging stations.
Triple-net (NNN) investors are increasingly eyeing California as a premier destination for net lease property investments, thanks to its economic power, dense population centers, and diverse tenant mix. Here’s why NNN brokers and investors see California as a high-potential market despite its premium pricing:
1. Strong Economic Fundamentals with Resilient Tenant Demand
California boasts the largest state economy in the U.S., fueled by sectors such as tech, healthcare, logistics, entertainment, and agriculture. NNN investors benefit from the state’s dense urban markets—including Los Angeles, San Francisco, San Diego, and Sacramento—where tenant demand remains robust for essential retail, medical services, and quick-service restaurants (QSRs).
2. Institutional-Grade Tenants & Blue-Chip Locations
While cap rates in California tend to be lower (typically ranging between 4% to 5.5%), they are balanced by the high credit quality of tenants and strategic real estate locations. Investors are often able to secure long-term leases with national brands like Starbucks, CVS, Chick-fil-A, 7-Eleven, and Amazon distribution centers, which can provide stable cash flow and strong residual value.
3. Diverse Markets Across Urban and Suburban Regions
California offers investment opportunities across core urban hubs and fast-growing secondary markets like the Inland Empire, Fresno, and Redding. These regions are experiencing population shifts and economic diversification, offering NNN investors access to better cap rates and lower entry costs compared to prime coastal cities.
4. High Barriers to Entry Protect Long-Term Value
California’s stringent zoning regulations and limited new development act as a natural barrier to oversupply, helping protect asset values over time. For NNN investors, this translates into greater tenant stickiness and long-term appreciation, especially in irreplaceable retail corridors or high-traffic suburban intersections.
5. Increasing Interest from 1031 Exchange Investors
Despite its higher costs, California remains a top target for 1031 exchange buyers, particularly those seeking to reinvest capital into stable NNN properties within the state. Investors often pursue income-generating properties in tax-efficient structures such as Delaware Statutory Trusts (DSTs), especially in high-demand areas with limited inventory.
6. Growing Demand for Industrial and Medical Net Lease Assets
In addition to retail and QSRs, California’s NNN market is seeing increased investor interest in industrial and healthcare properties. The state’s booming e-commerce and biotech sectors, along with a rising need for outpatient medical services, are driving strong absorption rates for these asset types—offering long-term, inflation-protected leases with built-in escalations.
Income Taxes
California’s Tax Landscape for NNN Investors: High Returns with High Tax Considerations
California is one of the most dynamic markets for triple-net (NNN) property investments, offering access to high-quality tenants, strong demographics, and resilient real estate fundamentals. However, the state’s tax structure presents notable challenges for investors. Here’s what NNN investors and brokers need to know when considering net lease properties in California:
1. No State Income Tax on Passive LLC Income
California does tax passive income earned through an LLC, including rental income from NNN properties. LLCs classified as pass-through entities must pay:
An $800 minimum annual franchise tax, regardless of income
An LLC fee based on gross receipts (ranging from $900 to $11,790)
This makes California less tax-efficient than no-income-tax states like Texas or states like Alabama, which do not tax passive LLC income.
2. High Corporate Income Tax Rate
If investing through a corporation, be aware that California imposes an 8.84% corporate income tax, one of the highest in the country. S-corporations face a reduced rate of 1.5%, but profits passed through to shareholders are still subject to California’s personal income tax—reducing overall returns for corporate investors.
3. High Personal Income Tax Rates
California’s progressive personal income tax system is among the most burdensome in the U.S., with a top marginal rate of 13.3% for individuals earning over $1 million. The general tax brackets are as follows:
1% to 9.3% on income up to $312,686 (for single filers)
10.3% to 13.3% on income above that threshold
These high rates significantly impact the net returns of individuals investing in NNN properties through pass-through entities such as LLCs or partnerships.
4. No Estate or Inheritance Tax
California does not impose an estate or inheritance tax, which is a favorable aspect for long-term investors looking to preserve and transfer wealth. However, this benefit is often offset by high capital gains taxes and personal income taxes.
5. Relatively High Property Taxes (But Capped)
California’s property tax rate is approximately 1.1% of assessed value, but it is limited by Proposition 13, which caps annual increases in assessed value to 2% unless the property changes ownership. While the rate isn’t the highest in the nation, property values in California are significantly higher, leading to high absolute property tax bills.
6. Capital Gains Taxation
California does not differentiate between capital gains and ordinary income—all are taxed at the applicable personal income tax rate (up to 13.3%). For investors exiting NNN investments or completing a 1031 exchange, this can result in a substantial tax burden unless properly deferred or reinvested under IRS rules.
Investing in triple-net lease (NNN) properties in California offers access to some of the most dynamic real estate markets in the U.S. While the state presents challenges such as higher taxes and regulatory complexities, it also provides opportunities in regions experiencing significant population growth and economic development. Here are some of the top counties and cities in California to consider for NNN property investments:
1. Riverside County (Inland Empire)
Population Growth: Riverside County has been among the fastest-growing counties in California, driven by its affordability and proximity to major employment centers.
Economic Development: The county’s economy is bolstered by logistics, manufacturing, and healthcare sectors. The Inland Empire region, which includes Riverside, is a significant hub for warehousing and distribution, benefiting from its strategic location and transportation infrastructure.
Investment Potential: The combination of population growth and industrial expansion makes Riverside County attractive for NNN investments, particularly in industrial and retail properties.
2. San Diego County (North Park and Suburban Areas)
Population Growth: San Diego County continues to experience steady population growth, with suburban areas like North Park attracting young professionals and families.
Economic Development: The county’s economy is diverse, encompassing biotechnology, defense, tourism, and international trade.
Investment Potential: Neighborhoods like North Park offer opportunities for NNN investments in retail and mixed-use properties, benefiting from the area’s vibrant community and economic stability.
3. Sacramento County:
Population Growth: Sacramento County has seen consistent population increases, partly due to its relative affordability compared to the Bay Area.
Economic Development: The county serves as the state capital, with a strong presence of government, healthcare, and education sectors. Recent investments in infrastructure and housing have further stimulated economic activity.
Investment Potential: The growing population and economic diversification make Sacramento County a promising area for NNN investments, especially in retail and office properties.
4. Fresno County (Central Valley):
Population Growth: Fresno County is experiencing population growth as people seek more affordable living options within California.
Economic Development: The county’s economy is rooted in agriculture but is diversifying into sectors like healthcare, education, and logistics.
Investment Potential: The expanding economy and population create opportunities for NNN investments in retail and service-oriented properties.
5. Santa Clara County (Silicon Valley):
Population Growth: While growth has slowed, Santa Clara County remains a significant population center due to its role in the tech industry.
Economic Development: Home to numerous tech giants, the county’s economy is robust, with ongoing investments in technology and innovation sectors.
Investment Potential: High demand for commercial spaces, particularly in tech and research sectors, makes Santa Clara County suitable for NNN investments in office and specialized retail properties.
6. Orange County:
Population Growth: St. Orange County maintains a stable population with pockets of growth in certain cities.
Economic Development: The county’s economy is diverse, including tourism, healthcare, and professional services. Its coastal location and quality of life continue to attract businesses and residents.
Investment Potential: The strong economic base and demand for commercial spaces make Orange County favorable for NNN investments, especially in retail and healthcare properties.
Pros:
1️⃣ Strong Property Appreciation
California consistently ranks among the top states for long-term real estate appreciation. Key metro areas like San Francisco, Los Angeles, San Diego, and San Jose have seen steady property value growth, which enhances exit strategies for NNN investors.
2️⃣ High-Quality Tenants & Demand
California is home to numerous Fortune 500 companies, strong national retailers, and high-credit tenants. Demand for prime retail and commercial space remains strong in dense urban centers and affluent suburbs.
3️⃣ Robust Economy & Diverse Industries
California boasts the largest state economy in the U.S., driven by tech (Silicon Valley), entertainment (Los Angeles), agriculture (Central Valley), and tourism (coastal cities). This economic diversity helps stabilize NNN investments even during downturns.
4️⃣ Dense Population Centers
Cities like Los Angeles, San Diego, and San Francisco provide access to large, affluent consumer bases. High foot traffic supports retail tenants, QSRs, medical offices, and essential service businesses.
5️⃣ Favorable Demographics
California has a young, educated, and tech-savvy population. This supports demand for healthcare services, innovative retail formats, and experiential tenants—ideal for modern NNN leasing models.
6️⃣ Urban Redevelopment & Infrastructure Investment
Numerous California cities are investing in infrastructure, mixed-use development, and public transit. These trends support long-term NNN investment value in urban infill and transit-oriented sites.
Cons:
1️⃣ Lower Cap Rates
California cap rates typically range between 4%–5%, among the lowest in the country. Investors seeking strong cash flow may find better returns in secondary markets like Alabama or Texas.
2️⃣ High State Income Taxes
California has the highest top state income tax rate in the U.S. (13.3%). Rental income from LLCs and personal returns can be significantly impacted, especially for high-net-worth investors.
3️⃣ Expensive Property Prices
Entry prices for commercial properties are significantly higher in California, especially in coastal and urban areas. This creates a higher barrier to entry for investors and limits affordability for portfolio expansion.
4️⃣ Complex Regulations & Land Use Restrictions
California is known for strict zoning, tenant protections, CEQA compliance (environmental review), and longer permitting times. This can slow down development and lease turnovers compared to more business-friendly states.
5️⃣ Risk of Natural Disasters
Earthquakes, wildfires, and drought are all risks in various parts of California. This increases insurance premiums and operational risk, particularly in high-fire zones or fault-line areas.
6️⃣ Market Saturation in Urban Hubs
Highly desirable areas like San Francisco and Los Angeles can be oversaturated with retail or office supply. Finding undervalued or high-yield NNN deals in these markets is increasingly competitive and expensive.
California NNN Properties for 1031 Exchange
Invest in Free Standing Single Tenant Triple Net (NNN) Properties in California
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At Triple Net Investment Group, we specialize in the sale of single tenant NNN properties and triple net shopping centers across the United States. Our team is dedicated to helping investors find high-quality (Tenant Triple Net) NNN properties in California and nationwide that align with their financial goals and 1031 exchange requirements.
With our in-depth market knowledge and personalized service, we provide tailored investment strategies for both buyers and sellers of commercial real estate. Whether you’re looking to defer capital gains through a 1031 tax-deferred exchange or want to diversify your portfolio with income-generating assets, our team offers a wide selection of vetted NNN investment properties.
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