What Makes a Successful Triple Net Lease?

There is still some confusion among new investorsSuccess over what a triple net lease is and under what circumstances a triple net lease is a smart investment.

Although every investment is unique, there are several things that are common amongst successful triple net lease investments. Understanding what a triple net lease is key to understanding what makes a triple net lease successful.


This podcast will help you get clear on how to choose the best triple net lease property.

The Evolution of a Commercial Real Estate Investor

Remember your first days getting started investing in commercial real estate properties? This infographic takes a humorous look at those early days.

Those early days weren’t easy – but it does get better. Lighten up someone’s day – share this infographic if you like it.

 

The Evolution of a Commercial Real Estate Investor
Explore more visuals like this one on the web’s largest information design community – Visually.

Should You Manage Your Commercial Property? 3 Tips to Help You Decide

If you’re just getting started out owning commercial real estate investment properties, you might be wondering how you’ll handle managing your new property, while holding down a full-time job too.

If you’re like most people, you’ve probably heard horror stories about the tenants from hell, or perhaps you’ve heard the same about property management companies who milk owners for every dime they can.

The truth is actually somewhere in between. There are tenants who can be very difficult to handle, and in fact the process of finding a new tenant for a property requires a great deal of time and experience in order to ensure you find the right tenant for your property and investment goals. On the other hand, management companies can take a hefty cut out of your bottom line, and aren’t necessarily motivated to keep costs low.

In the end, there’s no cut and dry answer about whether or not you should hire a property manager. The answer will depend on several factors, including your investment goals, how much experience you have managing properties, how much time you have, and your personality.

However, there are certain factors that you should take into account when making the decision:

Nobody cares about your property as much as you do
This is an old saying, but as old sayings go, it’s probably true. You are naturally more invested in your commercial real estate investment’s success, and will therefore invest more effort in finding and retaining a good tenant.

Managing your own property saves money – sometimes
Time is money, especially if you already work a full time job. As owner and manager, you could find yourself responsible for exploding pipes in the middle of the night, sudden roof repairs, or simply an invasion of rodents.

The time you spend tracking down the right person to do the job at the right price could be at the expense of your full time job. Thus, if you’re tight on time it might be worth it for you to pay 10% of the property’s monthly rent in order to free your time up for other things.

On the other hand, since managers usually charge anywhere from a half a month to a full month’s rent for finding and vetting new tenants, some owners prefer to be the ones to interview and accept new tenants, while giving over the day to day responsibilities to a management company.

Others choose to spend all of their time building their investment portfolio, then once they own a significant number of commercial income properties, are able to use leverage to get a better deal with a management company.

For those investors who want a completely hands-off property, then triple net lease properties make the most sense, since these leases specify that the tenant is responsible for all maintenance and repairs.

Consider opening your own management company
Some commercial property owners with large holdings have decided to have the best of both worlds by opening their own management company. The management company is opened as a second business, but hire an employee to handle the day to day running of the company.

They still “pay” 10% of the costs to the management company, but of course this money goes straight back to their coffers. This allows them not only to save money on taxes as well.

The bottom line is that deciding to hire a management company depends on several factors, some of which may change depending on your commercial investment. Keep in mind that if you choose one method and it doesn’t work out, you can always stop what you’re doing and choose the option that’s best for you.

Triple Net Lease and Its Use with 1031 Trades

The ability to defer capital gain taxes on the sale of triple net lease property has been around since 1921. In 1935 the Board of Tax Appeals approved the first modern tax-differed exchange using Qualified Intermediaries.

The 1954 Amendment to the Federal Tax Code changed Section 112 (b)(1) number to Section 1031 of the Internal Revenue Code and adopted the present day definitions and description of the tax –deferred like-kind exchanges that triple net leases are utilized frequently.

The Starker family tax-deferred like-kind court decision established the need for regulations regarding delayed tax-deferred exchanges. This now famous case prompted the United States Congress to eventually adopt the 45 calendar day Identification Deadline and the 180 calendar day Exchange Period as part of the Deficit Reduction Act of 1984.

The Tax Reform Act of 1986 eliminated accelerated depreciation and put like-kind exchanges in the limelight as being one of the few income tax benefits left for real estate investors and their triple net lease purchases.

The Revenue Reconciliation Act of 1989 disqualified like-kind exchanges between domestic and non-domestic properties and placed a two year holding period requirement on related party exchanges that include triple net lease property.

Revenue Procedure 2000-37 gave investors guidelines on how to structure reverse tax-deferred like-kind exchanges transactions.

Revenue Procedure 2002-22 provided investors with additional like-kind replacement property options including triple net lease structures that had not existed before- Co-Ownership of Real Estate (CORE). CORE is most frequently referred to as Tenants in Common or TIC investments.

Revenue Procedure 2005-14 made effective on January 27, 2005 made it possible for the first time for homeowners to use the tax-deferral mechanism of Section 1031 on their primary residence, if specific steps outlined in the code were carefully followed.

Triple Net Lease Property A Income Producing Property

If you’re looking for the best way to make some money in real estate, you need to understand the ins and outs of the triple net lease property. Understanding your lease options as an investor is the best way to decrease costs, increase revenue and increase the value of your commercial property.

A triple net lease is often referred to as a NNN or net-net-net lease. In a triple net commercial lease the tenant pays the landlord, or lessor, rent plus also covers the real estate taxes, insurance and maintenance. This kind of lease is used often in commercial real estate. It is very popular amongst retail and industrial properties.

Other versions of the net lease are the single and double net lease. In a single net lease the tenant pays rent and real estate taxes. In a double net lease the tenant pays rent, taxes and insurance. There is a variety of ways to approach a commercial real estate deal and this triple net lease structure may be the easiest and best scenario.

Triple Net Lease deals allow for less capital outlay for the investor and lower fixed rents for the tenant. Some tenants are not in favor to sign up for a triple net lease as they can make their variable costs higher and unpredictable. For example, maintenance like replacing or fixing roofs, gutters, and other parts of the building could add on to their costs.

Commercial real estate rental offers many advantages over residential which the astute investor who has experience is well aware. The primary advantage of commercial over residential is that commercial properties are valued based on their income not comparable sales. So the more you can increase your net income by decreasing your costs or increasing your revenue then the more you increase the value of your property.

By placing the burden of maintenance, insurance and taxes onto the triple net lease tenants, net income increases and so does the value of your property. The more you can increase the monthly revenue the more positive cash flow, profit that is, you have.

So in order to make the most out of commercial real estate you need a strategic plan. First, acquire or save up the down payment. Find some a professional commercial real estate company like Westwood Net Lease Advisors, to guide you through the possible pitfalls of retail, industrial or office buildings. Do the necessary amount of cosmetic work to make the property achieve the greatest amount of income. Next, have the tenants sign a triple net commercial lease. They pay the mortgage through the rent and cover the major costs of the property, leaving only the profits for you to further invest.

The Triple Net Lease is a great tool for generating maximum income while reducing risk and income fluctuations at your commercial real estate properties.

If you, like we do, rely on income from your investment portfolio to support your family, you know it’s important to make sure you have enough coming in each month to pay your bills and provide for your lifestyle. Income fluctuations due to expense increases can put an unwelcome damper in your standard of living. Triple net leases help to even out these bumps by passing the burden of the costs on to your tenant.

Triple Net Lease

All About Triple Net Lease Investment

The single Tenant Triple Net Lease is typically a free standing building that is leased to a single business tenant for a long term, often 10-25 years. The term originally meant net of taxes, net of insurance, and net of maintenance – hence triple net terminology. According to the terms of absolute Triple Net Lease, the tenant is responsible for all property operating expenses, including insurance, taxes and all maintenance. NNN properties are made up of various classes like retail, office and industrial.

Triple Net Lease property offer the benefit of little or no management responsibilities, as the tenant pays for most, if not all, of the expenses depending on the terms of the lease. The investor receives the rent with little to no other involvement. With absolute Triple Net Lease, the tenant is responsible for all expenses, making this a true passive investment for the owner, and allows an investor to buy property far away from their place of residence.

Triple Net Lease with commercial tenants are generally high quality business tenants and they usually have a vested business interest in making sure that a location is well maintained and attractive to customers. As a result, the tenant has an economic reason to enhance the real estate investor’s property over time, and frequently the tenant will make significant property improvements at their own expense to most Triple Net Lease property.

Single Tenant Triple Net Lease properties include Retail, Industrial and Office buildings. Major restaurant chains like McDonalds and Burger King operate under Triple Net Lease agreements typical of nnn properties. Retailers like Target and Home Depot, as well as specialty service centers like Jiffy Lube and Pep Boys, also belong to the long-term Triple Net Lease family. Industrial businesses like FedEx, distribution centers, and manufacturers operate under Triple Net Leases as well as medical offices and educational institutions enter into the arena of the Triple Net Lease.

How is the structure with Triple Net Lease different from other commercial leases?

Single tenant Triple Net Leases differ from other types of Triple Net Lease properties in two important ways – 1) the numbers of tenants, and 2) the tenant’s responsibilities.

Most other commercial property investments – such as office buildings, apartments and retail properties – have multiple tenants, and the real estate owner pays the operating expenses and provides on-site management. The owner takes care of leasing out individual units for short terms, renovates the premises as necessary, collects the rent, pays the property taxes, maintains the property, and is responsible for all insurance, legal, accounting and other expenses. Triple Net Lease Properties avoids these issues and provides safety without the hassle of the pre-mentioned responsibilities. Many NNN properties for sale nationwide that vary in size and price range.

In a single tenant Triple Net Lease agreement, a corporate and/or individual tenant agrees to be responsible for all of the expenses associated with the ownership of the property in return for a long term lease. The investor/owner’s role in Triple Net Lease Properties, is a passive one – effectively like “coupon clipping” in bond investments. Investors just go to their mailbox to collect a monthly rent payment.

An added investor benefit in Triple Net Lease Properties can be property improvement over the term of the Triple Net Lease. Conscientious, credit-worthy corporate tenants usually improve the appearance and functionality of their leasehold in order to be more successful with their clients or customers. As a result, the property in question is well maintained, and may even appreciate in price as a result of improvements, which would represent an additional return to the investor at the time of sale of these Triple Net Lease Properties.

A Triple Net Lease is generally structured in one of three ways:

  1. Sale/Leaseback: A sale and leaseback financing is structured through the sale of a property owned by a strong business. The business/tenant sells the property to an investor, and leases it back on a long-term Triple Net Lease just part of the family of Triple Net Lease Properties.
  2. Existing Property Sale: The sale of an existing nnn properties by a third party investor.
  3. Build-to-Suit: A developer enters into a long-term agreement with a corporate tenant, builds the facility to the tenant’s specifications, and then sells the property with the new NNN lease upon completion of the development or before another example of Triple Net Lease Properties.

What is a Sale/Leaseback and why is it considered part of Triple Net Lease Properties?

A sale/leaseback is when a business sells its commercial property for current market value and then leases it back from the buyer, typically using an absolute NNN lease properties structure. The seller retains the use of their real estate and frees up capital which can be used to invest back into the business. Real estate sale/leasebacks are popular with business owners because they generate capital for immediate use within the business, and create a predictable rent that is deductible for federal and state income tax purposes. These entities become an integral part of Triple Net Lease Properties as well as NNN investment properties.

What are the primary benefits of a Triple Net Lease representative of the family of NNN Properties?

Triple Net Lease investments benefit investors and tenants alike. Tenants with nnn leased properties enjoy the security of a long term lease at favorable pricing, and control over the property in which their business is housed, as well as control of maintenance and renovation costs. NNN properties offers unique qualities that simply other commercial properties don’t.

Investors similarly enjoy the security of the long term Triple Net Lease, and the high cash return on their passive investment, as they own the NNN Lease Property yet have zero on-site management responsibilities and no operating expenses.

Triple Net Lease Properties investment are also flexible and offer additional upside, as at any time the investor can cash-out, most often with a profit, by selling the property, as the value of the real estate frequently appreciates during the lease term. The investor also can hold the property, allow it to further appreciate in market value, and lease it again at a higher rate to the original tenant or a new tenant when the lease term expires.

Finally, Triple Net Lease Properties are also relatively easy and safe for investors to engage in, as they are hassle-free transactions with minimal costs, and present a minimal risk with strong tenants and long leases. An investor can also choose an opportunity for higher cash returns by taking on less than investment grade tenants.