What
is a Triple Net NNN lease?
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.
What is Build-to-Suit?
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.
What is a
Ground Lease?
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.
-
A ground lease substantially reduces the tenant’s front-end development costs because it eliminates land acquisition costs.
-
All rent payments made under a ground lease are deductible by the tenant for federal and state income tax purposes.
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.
Subordinated and Unsubordinated Ground Leases
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.
Financing
NNN Deals
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...
- You can defer capital gains taxes through a 1031 tax-deferred exchange.
- Triple-net leases are either 100 percent management-free or require very little involvement from the landlord.
- Triple-Net lease property has high residual value and is a liquid investment.
- You can get non-recourse, fixed financing for 10 years with Triple-Net lease properties.
- There are no vacancy factors, tenant improvement costs, management fees, or leasing fees.
- Location! Location! Location! Properties are typically in prime retail areas with high traffic counts and great demographics.
- You don’t have to worry about tenant turnover. Your tenants sign leases of 10 to 25 years.
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.
What is a Sale Leaseback?
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.
About 1031 Exchanges:
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.
The information above has been obtained from sources
believed reliable. While we do not doubt its accuracy we have not verified
it and make no guarantee, warranty or representation about it. It is your
responsibility to independently confirm its accuracy and completeness.
Any projections, opinions, assumptions, or estimates used are for example
only and do not represent the current or future performance of the property.
The value of this transaction to you depends on tax and other factors
which should be evaluated by your tax, financial, and legal advisors.
You and your advisors should conduct a careful, independent investigation
of the property to determine to your satisfaction the suitability of the
property for your needs.
The properties shown on this website
may or may not be exclusively listed by SOLID
INVESTMENTS of Berger Realty Group.
All information shown on www.solidinvestmentsfl.com is believed to be
accurate, but is not warranted.
SOLID
INVESTMENTS of Berger Realty Group • Phone 954-876-1549
• Fax 954-944-1830
1600 S Federal Hwy Suite 1151 Pompano Beach, FL 33062
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