Tiple Net Leased (NNN) Properties are the traditional real estate investment with no management obligation for the owner. In its purest form (called a NNN - Triple Net Lease) the tenant manages the property, doing everything from paying all the operating expenses, property taxes, utilities, insurance premiums, maintenance and repairs. The landlord gets to collect monthly net rental income just as he or she would with a traditional real estate investment.
NNN’s are typically purchased on a cap rate. A cap rate is essentially a yield which is determined by dividing the tenant’s annual rent by the purchase price. For example, if Walgreens is paying $350,000 annually and the purchase price is $4,375,000, the cap rate is 8% ($350,000/$4,375,000).
A NNN Property can either be a single or multi tenant investment like a shopping center, office building or a free standing building. A NNN Leased investment gives you total (fee-simple) ownership of a commercial property, which is pre-leased to a high credit retail tenant – (Walgreens, CVS, McDonald's, Lowe’s, Dunkin Donuts, etc.) – on a long-term basis (usually between 10-25 years), providing you with a stable, long-term cash flow. NNN leased property can be an excellent replacement property in completing a 1031 real estate exchange transaction.
The price range for a Single Tenant NNN lease property is generally between $1 million - $10 million. The fast food restaurants and auto stores and are the most affordable, while drugstores are on the higher end. Big box retailers such as Home Depot, Lowe’s, and Publix can bring from $15 million to $25 million.Example:
Walgreens is your tenant for a guaranteed 25-year period. The tenant is responsible for all costs to operate and maintain the property, this is sometimes referred to as an “absolute” Triple-Net lease because the only management required is paying the mortgage (if there is one) and receiving the rent checks. Triple-Net lease ownership is great for first-time real estate investors as well as for long time investors seeking purchase or trade into less complicated real estate investments. In many cases, when the lease expires, you will own the property free and clear.
Lease form is designed for a single tenant build to suit transaction, where the landlord builds the entire premises for the tenant. The rent payable by the tenant is pegged to the total construction and financing costs of the project, and is usually subject to percentage increases in specified years. This basically allows the tenant to move in and occupy the property with zero costs up front. Once the tenant & developer execute a lease, the developer acquires the land and constructs the property with his owns funds. This enables the tenant to have new construction, including the cost of the land acquisition, without actually using any of its own capital or credit in land and buildings. With no mortgage or other indebtedness to be carried as debt on the tenants balance sheet, the book value of the company’s assets is effectively understated — enhancing the company’s Return on Assets (ROA). The rent is fully deductible over the lease term, making the tenant's after-tax cost less than with alternative forms of asset-based financing. The owner of the property can depreciate the building because you own the building and the ground.
A lease of land only, on which the tenant usually constructs the building (usually required to build as specified in the lease) with their own funds and owns the building during the term of the lease. Such leases are usually long-term net leases; the tenant's right and obligations continue until the lease expires or is terminated through default. In its most basic terms, a ground lease is a method for separating ownership of the improvements (building) from the ownership of the underlying fee (ground). If you own a ground lease, you own a fee simple interest in the ground (not the building). The owner cannot depreciate a ground lease because you don't own the building, so you have nothing to depreciate.
The reason ground leases are desirable is because the tenant is only paying to rent the land and use their own funds for all of the improvements. If the tenant leaves, the owner of the land gets the improvements and since the rent is so low (because the tenant paid for all of the improvements and was only paying to rent the land) you should easily be able to increase your return on investment. So it could actually end up benefiting a buyer if the tenant exits. Ground leases trade at a lower CAP Rate because they are usually lower price points and below market rent.
A commercial ground lease is usually defined as a lease of land (typically the land is not improved), for a relatively long term (e.g., 25 to 99 years), where all expenses of the property are the obligation of the tenant (e.g., taxes, repair and maintenance expenses, insurance costs, and financing costs), and which allows for tenant financing for the construction of the project to be constructed on the land either by leasehold financing, and/or so called “fee subordination” financing. Ground leases, therefore, are not only leases in the traditional sense of the word but are also financing instruments.
There are two major advantages for a tenant entering into a ground lease, as opposed to purchasing the land.
Typically ground leases are long term and include set rent escalations, foreclosure rights should the lessee default, and a reversionary right, which means improvements on the property revert to the landowner at the end of the lease term. While such lease terms do not particularly favor developers, ground leases offer some distinct advantages.
Whichever is better depends on what the investing goals are for the property owner....both involve low maintenance, and low management; however, there are tax consequences which would effect the owner's bottom line.
The term “subordinated ground lease” refers to a ground lease in which the landowner has agreed to permit a lien to be placed against the owner’s fee simple interest in the land to secure the payment of the loan made by the construction lender or a subsequent lender to the tenant. The lender has a lien against both the fee simple interest of the landowner and the leasehold estate of the tenant. If there is a default under the loan, the lender may foreclose against both the fee title and the leasehold estate, in which case the owner loses its land.
In an unsubordinated ground lease, no lien is placed against the fee simple title to the land. Instead, the leasehold estate is the primary security for the loan.Reasons Why a Landowner Might Agree to Subordination
It is not typical in current arms length transactions for the owner to subordinate its fee interest, but there may be instances in which an owner is willing to do so. For example, an owner may be willing to subordinate its fee in order to enable the tenant to obtain financing to develop the property, particularly if the financing will permit enhanced development of the property or development of the property in a manner that will enhance the value of the owner’s adjacent or nearby property. Or, the owner may be willing to mortgage its fee interest in exchange for participating in the project’s profits.
These are investment properties that are not available on the open market. Frequently the owners do not want the public or tenants to know that their properties are for sale. Owners most often require that detailed information only be made available to qualified investors who have signed a Confidentiality Agreement. Also under this category are “pocket listings” that would normally only be made available to the brokers best clients. TM 1031 Exchange Inc. is specifically structured to provide a national venue for such properties.
Because most investors borrow funds to acquire Triple-Net properties, it is essential for them to work with a qualified mortgage broker to find the best possible financing for the type of property being purchased. An analysis of factors such as the tenant’s credit, location, capitalization rates, and loan terms is essential to determine the cash flow and security of a Triple-Net lease investment.
The minimum down payment usually required by lenders for a multiple tenant NNN property is 25% to 35% for investment grade tenants and 35% to 40% for most other tenants.The advantages of owning a Triple-Net leased property...
There are many excellent reasons to acquire an investment grade net-lease property for either a 1031 exchange or safe, dependable monthly income, including...
The most important reason investors like NNN properties is the simple enjoyment of owning income property without the hassle and expense of devoting time and money to the management of the property and at the end of the lease term you may well own the property free and clear.
A Real estate sale leaseback is when a business sells its commercial property for current market value and then instantly leases it back. They sell it to gain built up equity which frees up capital which can be used to invest back into the business. There are many other benefits to this transaction as well.
The balance sheet of your business is improved greatly and you retain control of the property. Since you will be leasing the property you can defer a good portion of the tax liability. With a lease you can write off the full payment each month whereas with a regular loan only the interest payment can be written off. When you complete this transaction you are always guaranteed the full market value of your property, so you don’t risk losing any money in equity.
The other benefit is that you can get a lease for commercial property for up to 25 years, which can lower your monthly payments considerably. This gives you more operating capital each month since your monthly payments will go back down some.
Real estate sale leaseback transactions are becoming more popular because they generate capital for immediate use within your business. It unlocks the value in your real estate. With real estate you can get more capital because of how fast it grows. Some businesses do sale and leaseback transactions for equipment as well.
Identification Period: A seller must identify another replacement property that he proposes to buy within 45-day period from the date he sold his relinquished property. The 45-day timeline is very rigid and does not allow any variances (even if the 45th day should fall on a weekend or holiday.) Note that during this period, the proceeds from the sale of the relinquished property are in the custody of the qualified intermediary.
Exchange Period: An individual has 180 days from the date of selling their property that was the basis for the 1031 to receipt of the newly-acquired property.
The period within which the person who has sold the relinquished property must receive the replacement property is referred to as the “Exchange Period” under 1031 of the IRC. This period ends at 180 days after the date on which the person transfers the property relinquished or the due date for the person's tax return for the taxable year in which the transfer of the relinquished property occurred, whichever is earlier. A word of caution: Many ill-advised or careless investors see the language referring to the due date for their tax return and assume they can wait until the last minute to purchase the new property. Remember – the deadline is the EARLIEST of the two scenarios. If an individual were to sell their 1031 property in May, the deadline for acquiring a new property (180 days) would fall well before their tax return in the spring of the following year.
While the utilization of 1031 exchanges can be an extremely valuable tool for maximizing tax savings, it is a very complex process and often difficult to navigate.
At Solid Investments we can assist you in locating a like-kind property for a 1031 exchange and ensure a smooth and successful transaction.