When you’re trying to make the decision as to whether or not to buy a Triple Net Lease (NNN) Property for your next 1031, or just as a cash flowing investment, you’re going to want to go through the obvious checklist of:
- Credit Strength of the Tenant
- Terms and Conditions of the Lease (who’s responsible for what)
- Length of the Contract Lease
- Location (I’ll include local demographics, competition, car counts, necessity of product/service being offered etc).
But I also believe that in any investment, it makes sense to know going in as to when you recoup your original investment. In other words, I like to see how long it takes to get my original investment back in cash flow alone.
This getting your investment back through cash flow doesn’t apply in every NNN purchase, but I still think it should be included in the pre-purchase check list.
The Power of 2%
We recently had a brand new Church’s Chicken restaurant for sale in Tennessee. It was priced at $3,150,000 at a 6.30% Cap Rate. The initial term of the lease was 20 years and offered 2% annual increases in the rent for the full 20 years plus into the options.
In doing the math, our investor would get all of their original investment back in just 14 years ($3,181,351 in rent) AND if they elected to continue to hold the property, they would receive an additional $1,657,633 in rent in years 15 through 20. Over twenty years of the lease they will have received $4,838,884 in cash flow (remember $3,150,000 was their purchase price). And if the options are exercised, their rent continues to grow at 2% per year.
In my opinion, what makes this Church’s Chicken such an attractive investment is the math. The 2% annual increases over 20 years allows them to get their investment back in only 14 years, which gives them the flexibility to decide on their own terms whether they want to continue to hold the asset or move onto to something else.