Risks of NNN Investments
John Vanhara Ray Alcorn is evaluating risks of NNN properties in the The Risks & Benefits of Triple-Net (NNN) Properties .
Contrary to popular belief, NNN Properties are not “risk-free” investments, and in fact require a level of understanding beyond that of more typical real estate investments.
Risk is always present
In evaluating any NNN deal, be aware that all “credits” are not equal. A company’s credit rating is determined by one of the three ratings firms (Standard and Poor’s, Moody’s, and Fitch), and those with a rating of BBB- and higher (S&P scale) are considered “investment grade.”
The ratings establish the relative risk of default for a particular company, but no investment except a federal bond has a zero default rate. This point is illustrated by the following chart of default rates of rated retail credits over a fifteen-year period:
Original Rating - Default Rate %*
AAA - .52%
AA - 1.31%
A - 2.32%
BBB - 6.64%
BB - 19.52%
B - 35.76%
CCC - 54.38%
Note that the increase in default rates first doubles, then triples, with each step downward in the credit rating.