What your NNN cap rate is really telling you

Triple net investments get shopped by cap rate because cap rate is the one number that fits in a subject line. It is a starting point and not much more. When you buy a NNN property you are buying a lease that happens to come with a building.

Read the term, not just the rate

• Years remaining on the primary term, which is what a lender underwrites
• Option periods, and whether the rent in them is fixed, indexed, or at market
• Rent escalations during the term, which decide whether your income keeps pace
• Who signs: the operating entity, a franchisee, or a corporate parent

A fifteen-year corporate lease with escalations and a five-year lease at flat rent to a single-unit franchisee are not the same asset at the same cap rate. One of them is priced wrong.

Triple net is a spectrum

Confirm in the document what the landlord still owns. Roof and structure are commonly carved out of tenant responsibility, and that carve-out is where an absolute net investment quietly becomes a management job. Read the maintenance and repair sections before you read the rent schedule.

Residual value

The lease eventually ends. What is left is a building in a location, and that is what protects your basis. A well-located building with generic improvements re-tenants. A purpose-built structure in a secondary location may not, whatever its cap rate looked like on the day you bought it.

The question to ask

Not what the cap rate is, but what you own at the end of the term. That answer is usually available in the lease, the site plan, and a drive through the trade area.