NNN Leasehold Investments - Time To Revisit?
With the shortage of desirable NNN investment property in densely populated urban areas as well as the continued cap rate compression for property, now maybe the time to consider investing in a NNN leasehold interest. Unlike the traditional net lease investment, the leasehold interest investor never takes title to the underlying land. The leasehold investor purchases the right to use the property during the remaining term of the leasehold subject to a tenant lease. At the end of the lease term, control of the real estate reverts back to the ground lessor, or owner of the land.
Beware; this is not a typical NNN property investment. It has its particular strengths and weaknesses. Factors to be considered in evaluating an investment in a leasehold interest:
- This segment of the net lease market fell out of favor with investors after the Great Recession. Cap rates and yields will be substantially higher than on comparable NNN fee investments.
- Many existing leasehold transactions still have relatively long tenant lease terms.
- Most investors will want to recover their initial investment by the maturity of the tenant lease resulting in a higher yield to the investor and a higher cap rate to the seller.
- Investors will be able to buy assets for a less capital since they are not purchasing the underlying land.
- Should the tenant extend their lease upon maturity, this could provide a substantial benefit to the investor if the investor has already recovered its investment during the initial term of the lease.
- Financing for leasehold investments which disappeared after the Great Recession may still be difficult to obtain.
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