Strategic Approaches to Mastering Triple Net Lease Properties

Taking a data-driven approach positions these assets for sustainable success in the long term.

Triple net (NNN) leases have long been a popular investment vehicle for commercial real estate, promising stable and secure rental income streams for property owners. NNN leases offer landlords several advantages over traditional leases because under this structure, tenants are responsible for property taxes, maintenance and insurance.

However, the COVID-19 pandemic highlighted the risks of overreliance on single-tenant properties and transformed investor strategies for NNN properties. This article explores more thoughtful approaches to mitigating risk, maximizing returns and future-proofing NNN investments in a rapidly evolving market.

The Foremost Challenge: Gaining Tenant Transparency

The main difficulty with managing NNN properties is gaining transparency into tenants’ operations and business performance. Traditionally, tenants provide sales reporting so landlords can assess business profitability at the property level. Often, however, tenants aren’t required to disclose this or are unwilling to do so.

When reliable data is lacking, conducting independent analysis to understand a property’s true potential becomes imperative. Factors such as location, competition, demographics and industry trends determine what a tenant’s business can realistically support regarding rent payments.

STAX Real Estate recently conducted an in-depth analysis of over 5,000 gas stations nationwide so it could predict the earnings potential for these specialized assets. It did this by developing a proprietary database that could aggregate sales data from gas stations and fuel suppliers. Having comparable unit-level sales data is essential.

Next, STAX analyzed other factors, including consumer behavior patterns, demographic forecasts, market saturation and economic trends. The datasets from mobile analytics providers were particularly helpful in establishing “revenue per customer visit” benchmarks.

It completed the picture with financial analysis, using data comparable to sales and capital markets. The rent, sales, interest rates and cap rates must all align with STAX Real Estate’s criteria for a deal to be feasible.

One of the most significant challenges is connecting the datasets from various sources. Artificial intelligence tools have been critical in STAX taking fragmented datasets and creating consistency for accurate analysis.

One of the most exciting findings is the correlation between residential areas meeting specific demographic criteria and the nearby areas of employment and education. Analyzing this correlation along with traffic patterns and mobile customer site visit data helps STAX understand why people tend to stop at one location versus another.

This strategy can be applied to other types of retail as well. For example, STAX is developing a similar model for medical retail, which also brings in datasets from health care providers to aid in forecasting the average spend per patient. (This concept was inspired by Meta/Facebook and its strategy for developing habit loops in user experience design.)

Cultivating Tenant Relationships Is Critical

One thing landlords can do to address transparency issues is build strong relationships with tenants to foster open communication. Maintaining a dialogue creates opportunities to better align business goals and renovation needs. Creating a standard operating procedure for the scheduled delivery of financial reports is one of the best practices for cultivating a prosperous landlord-tenant relationship.

Keeping channels open long term is equally important through tenant transitions. When it is time to reimage a property or bring in a new occupant, hands-on developers can more efficiently oversee renovations and conversions by coordinating directly with tenants based on their layout preferences and branding standards.

For example, the STAX team has successfully rebranded outdated fast-food locations into new Starbucks stores by facilitating refresh designs tailored to the coffeehouse chain rather than handing off a blank canvas. While this level of ownership in the process is more labor intensive, it also creates superior outcomes. There is opportunity to capture more of the profit margin between the underlying real estate acquisition and the disposition of the newly redeveloped asset.

From the developer’s perspective, there will be opportunities to engineer additional value. From the investment sales perspective, there will be more time to run a full market process, and they will have private access to development progress updates. This approach enables them to deploy capital and achieve a return on investment in a more compressed time frame than the typical independent developer can.

Harnessing Technology for Smarter Decisions

On the technology front, data analytics tools can provide valuable insights to optimize decisions. For instance, determining whether adding electric vehicle chargers makes sense hinges on quantifying actual local EV demand. This can be accomplished by analyzing metadata such as mobile traffic patterns to count the daily number of EVs passing retail sites.

Comparing data points from consumer demographic clusters, EV saturation, EV charging station locations, and mobile foot traffic patterns helps identify where most people stop and why. Once understood, it is easier to identify sites to fill the demand for additional EV charging. This data-driven approach allows for properly calibrating investments to avoid under- or overbuilding. To start with mobile foot traffic analytics and traffic pattern analysis, there are useful AI-powered tools like AlphaMap.com.

Project management technology also streamlines property oversight. Productivity platforms like ClickUp offer central hubs for coordinating contractors and tracking construction timelines. Features such as dependency mapping automatically adjust schedules when delays arise, saving countless emails and headaches. Solutions such as Airtable help to create custom databases and business applications to track, manage and share critical data throughout an organization. Adopting platforms such as these amplifies productivity, speed and returns.

Insights From the Investing Trenches

In summary, the key lessons from decades of experience are:

• Understand the business fundamentals supporting your real estate assets.
• Take a partnership approach to tenant relationships.
• Leverage technology to remove the guesswork.

While NNN properties still offer attractive income streams, taking a data-driven approach positions them for sustainable success in the long term. By evolving strategies to meet tomorrow’s demands, NNN investments can continue delivering durable value. Those exploring the single-tenant net lease asset classes can use these approaches to help guide more informed investment decisions. With the right toolkit and perspective, NNN properties remain compelling vehicles for long-horizon investors. 

Michael Salafia is the founder and managing partner of STAX Real Estate LLC, a platform for sale leasebacks of single-tenant net lease retail assets, located in Miami Beach.

• Marketing/Leasing
• Leases
• Property Management