Triple Net / NNN
WV Investment Real Estate specializes in the brokerage of single-tenant net leased retail properties nationally. Triple net lease investments are our most recommended form of real estate investment.
Shopping centers, office buildings, power centers, strip centers, and apartment complexes are management intensive. Single-tenant, triple-net, corporate-backed, retail properties are management free, reliable, and one of the most sought after types of real estate investments available.
A triple net lease, abbreviated NNN, refers to a lease in which the tenant pays for all expenses associated with:
Real estate taxes
In most instances with triple net leased retail property, the responsibility for the roof, building structure/foundation, and the parking area will be the tenant’s responsibly. In business terms, the word net is synonymous with “the bottom line,” or the total cash return to the investor. The tenant pays for net-real estate taxes (N), net-building insurance (N), and net-maintenance expenses (N) in a triple-net lease. The acronym for a triple-net lease is NNN. This abbreviation is widely used in real estate literature.
Triple-net leases are desirable investments because of their benefits compared to other types of investments. The major advantages of a triple net investment are:
Predictable monthly income
Considerable tax advantages
Credit-worthy corporations typically guarantee a triple-net lease
Long-term income to the investor
Some investors tend to think that triple net leased investment properties have a minimal return when compared to other types of investment real estate. Typically, the return for many income producing commercial properties is higher than the return on an investment with a triple net lease. Though the return is not as high, an investment property with a triple net lease will mean an investor never has to worry about any of the following:
Management expenses and/or fees
Tenant finish costs related to occupancy
Supplies and/or equipment replacement
Wasted time and energy
With the above taken into consideration, it is apparent that the return on investment with a triple net leased property is most often more profitable in the long run. The security of the triple net leased investment and the absence of management duties are the benefits of this type of lease that balance the lower return.
The tenant typically assumes the responsibilities of the following:
Property liability and fire insurance
Heating, ventilation, and air conditioning (HVAC)
Lease payment to the landlord
The above is a general summary of the tenant responsibilities in a triple net lease, and is part of the reason why this type of lease is so attractive to investors. The absence of management responsibilities enables investors to be at ease with their investment. Commercial retail tenants tend to have a vested business interest in making sure the properties that they occupy are attractive to customers. The tenant commitment insures that an investor will own a property that is well maintained and safe.
It is always wise for an investor to have an attorney and/or accountant to review the lease of a triple net investment property. Additionally, it is helpful to consult with an insurance agent if additional insurance coverage is needed or is beneficial to the investor. Also, an exchange accommodator will be needed to assist and smooth the transfer of ownership in an exchange situation. Preferably, these professionals should have experience specifically in the area of NNN investment real estate.
Willis Ventures Investment Real Estate Brokerage has the necessary contacts and expertise to assist an investor in all the areas necessary to complete the purchase of a triple net leased investment.
1031 Tax Deferred Exchange
Willis Ventures assists investors with the purchase of management-free, high credit income producing properties. Many investors are breaking away from other types of investment real estate, such as management intensive properties, i.e. apartments, and choosing to invest their equity in net-leased retail investment properties. There are obvious benefits in moving away from a high risk, management intensive property and many investors have chosen to re-invest their equity into net-leased investments because of the ability to avoid paying taxes by using a 1031 tax deferred exchange.
A 1031 exchange is one of the most powerful tools available to investment real estate. The main advantage of a 1031 exchange is that it allows an investor to sell an income producing property (down leg) and avoid paying taxes if they purchase another income producing property (up leg). The transfer of equity from the downleg property to the upleg property is what qualifies it as an exchange. This allows investors to move their investment equity to different real estate properties and defer the taxes that would otherwise be due to the government.
In order for the taxes to be deferred, there must be an exchange. Section 1031 of the Internal Revenue Code provides a full description of tax-deferred exchanges.
Qualifying property is property held for investment purposes or used in a taxpayer's trade or business. Investment property includes real estate, improved or unimproved, held for investment or income producing purposes. Real estate must be replaced with like-kind real estate.
Property that typically does not qualify for a 1031 exchange includes the following:
A personal residence
Land producing no income
Non income producing property under construction
Non income producing property purchased for resale
Replacement property must be taken under the same name as the relinquished property. If a husband and wife own property in joint tenancy or as tenants in common, the replacement property must be deeded to both spouses, either as joint tenants or as tenants in common.
For an exchange to qualify as a 1031 exchange, the property needs to be like-kind. One property can be exchanged for two or more properties. Two or more properties can be exchanged for one replacement property. Investment property can be exchanged for business property and vice versa.
Boot means gains realized on a trade. Boot should be avoided in order for a 1031 Exchange to be completely tax-free. The term "boot" is not used in the Internal Revenue Code or the Regulations, but is commonly used in discussing the tax consequences of a Section 1031 tax-deferred exchange.
To avoid "boot" it is recommended to replace with property of equal or greater value than the relinquished property.
A Simultaneous Exchange is an exchange in which the closing of the relinquished property and the replacement property occur on the same day, usually back-to-back. There is no interval of time between the two closings.
This is the type of exchange, which occurs most often in investment real estate. In this type of exchange the replacement property (upleg) is closed on at a later date than the closing of the relinquished property (downleg). The exchange is not simultaneous or on the same day. This type of exchange is often referred to as a "Starker Exchange."
Taxpayers that desire to make a 1031 exchange list their property for sale in the normal manner without regard to the planned 1031 exchange. A buyer is found and a contract to sell the property is completed.
When contingencies are satisfied and the contract is scheduled for a closing, the services of an exchange intermediary are arranged for. The taxpayer enters into an exchange agreement with the intermediary. This permits the intermediary to become the "substitute seller" in accordance with the requirements of the code and regulations.
The 45-Day Rule for Identification
An investor must identify the potential upleg property within 45 days from the selling date of the downleg property. The identification must be in the form of a written document (the identification notice) signed by the taxpayer sent to the exchange intermediary. The identification notice must contain an unambiguous description of the replacement property. This includes the legal description, street address or a distinguishable name.
After 45 days limitations are imposed on the number of potential replacement properties. More than one potential replacement property can be identified under the following three conditions:
The Three-Property Rule - Any three properties regardless of their market values.
The 200% Rule - Any number of properties as long as the aggregate fair market value of the replacement properties does not exceed 200% of the aggregate FMV of all of the exchanged properties as of the initial transfer date.
The 95% Rule - Any number of replacement properties if the fair market value of the properties actually received by the end of the exchange period is at least 95% of the aggregate FMV of all the potential replacement properties identified.
The 180-Day Rule
An investor has up to 180 days to close on the replacement property. The replacement property must be received no later than 180 days after the transfer of the exchanged property. The replacement property received must be the same as one of the properties that was identified under the 45-day rule described above.
For a more detailed explanation of 1031 Exchanges,
please view the California Association of Realtors website, and search for 1031 Exchanges.