Due Diligence Process for Buying a NNN Property

The due diligence process is critical when purchasing a NNN (Triple Net) property. It ensures you fully understand the asset, its lease structure, and potential risks before closing. Below, we break down the key steps you should take during this process:

1. Lease Review

The lease is the backbone of any NNN property investment. Here’s what to focus on:

Obtain All Lease Documents: Ensure you have the original lease, amendments, extensions, and tenant letters.
Understand Lease Clauses: Pay close attention to rent escalation clauses, renewal options, and termination rights.
Review Tenant Responsibilities: Confirm the tenant’s obligations for repairs and maintenance, including HVAC, roof, parking lot, and trash removal.
Insurance Requirements: Verify tenant-provided insurance coverage and ensure it aligns with lease terms.
Casualty and Damage Clauses: Understand who is responsible if the building is damaged or destroyed (e.g., fire or natural disasters).

2. Tenant Evaluation

Assess the financial health and reliability of the tenant:

Review Tenant’s Financials: Obtain the tenant’s credit rating and financial statements, if possible.
Corporate vs. Franchise: Confirm whether the lease is backed by a corporate guarantee or an individual franchisee.
Industry Trends: Consider the tenant’s long-term prospects in their industry.

3. Property Condition and Inspections

A thorough understanding of the property’s condition is essential to avoid unexpected costs:

Building Inspection: Hire a professional inspector to assess the structure, roof, HVAC systems, and plumbing.
Repairs and Upgrades: Note any deferred maintenance or upgrades required.
Code Compliance: Ensure the building meets current zoning and safety codes.

4. Survey

A property survey identifies potential boundary or legal issues:

Boundary Lines: Confirm there are no encroachments or easement conflicts.
Access and Utilities: Verify access to public roads and utility connections.
Zoning Compliance: Ensure the property is zoned for its intended use.

5. Environmental Assessment

Evaluate environmental risks that could affect the property’s value:

Phase 1 Environmental Assessment: Conduct a basic environmental review to identify any potential contamination.
Phase 2 Environmental Assessment (if needed): If Phase 1 reveals concerns, proceed with a Phase 2 to investigate further.

6. Title and Legal Review

Ensure the property’s title is clear and legally sound:

Title Search: Review for liens, encumbrances, or title defects.
Legal Compliance: Ensure all property documents comply with local, state, and federal laws.

7. Financial Review

Understand the property’s financial metrics:

Rent Roll: Verify rental income and expenses align with lease terms.
Operating Expenses: Confirm all tenant reimbursements and property taxes.
Market Comparisons: Compare cap rates and rental terms to similar properties.

8. Closing Preparation

Before finalizing the purchase:

Review Due Diligence Findings: Ensure all inspections, reviews, and assessments are completed to your satisfaction.
Negotiate Terms: Address any issues uncovered during due diligence with the seller.
Secure Financing: Confirm your financing aligns with the property’s value and cash flow.