With the variety of leases available out there for landlords to offer their tenants, what’s so special about the triple net (NNN) lease? How can a triple net lease save a landlord money and hassle? Does it offer any additional benefits compared to other types of leases? What should landlords know about an NNN 1031 Exchange when a property is sold?
Here are the answers to all those questions.
The Basics of the Triple Net Lease
If you’re a landlord of a freestanding commercial, retail, or medical building, then you should take the time to get to know all about the triple net lease.
The triple net lease features a structure where the tenant pays for the operating expenses associated with a property. This lease will typically have an initial term of at least 10 years, and rent increases are built in. Most likely, the contract will include a smaller lease payment, but the upkeep costs will be the responsibility of the tenant.
Therefore, when a tenant signs this lease, they pay for the occupancy of their space as well as the following three items, wrapped up into one monthly rent payment:
- Property Taxes
- Common Area Utilities (CAMS) such as a lobby attendant, janitorial services, and utilities
While a triple net lease is often signed by a single tenant renting an entire building, it can also be used in buildings with multiple tenants. When this is the case, each tenant’s
monthly payment of the three “nets” is usually calculated based on their proportionate
Benefits of the Triple Net Lease
While the downside of a triple net lease is a lower monthly lease payment made to the landlord, the benefits will most likely far outweigh the difference in income. Triple net leases tend to be quite landlord-friendly for the following reasons:
- Fluctuations in property taxes, increases in insurance rates, and unpredictable maintenance expenses are all taken care of by the tenant.
- The NNN lease amount can fluctuate from month to month and year to year to keep up with operating expenses. This helps to decrease risk to the landlord.
- Since expenses are passed on to the tenant, the landlord’s income stream is steady and predictable.
- NNN leases are signed for 10+ years as an initial period and have rent increases built in, so lease renewals and rent negotiations/adjustments don’t come up very often.
- Landlords enjoy a relatively hassle-free investment due to the low management requirements.
Although the above-mentioned benefits are excellent, there are a few risks to be aware of before signing the triple net lease.
- Not all expenses associated with a property are covered under the NNN lease. For example, accounting and legal costs are still the responsibility of the landlord.
- If the NNN lease is used for a single-tenant property, there is a tenant credit risk. If the tenant goes bankrupt, the landlord will be left with a property that is 100% vacant.
- Since some triple-net leased properties sell toward the end of the term, there is the risk of releasing. This could present tenant rollover risk if the landlord is inexperienced or unprepared.
What You Need to Know About the NNN 1031 Exchange When You Sell a Rental Property
When it comes time for you to sell your rental property, triple net leases are exceptionally liquid. This is because buyers are easily found for these types of properties.
A 1031 Exchange on a triple net lease property sale is a straightforward way to defer the capital gains, federal, and state taxes associated with such a transaction. To gain this benefit, a landlord just needs to use all the proceeds from the sale to invest in another “like-kind” property within 180 days. This can be done on multiple triple net lease properties at a time. This is especially good news for investors who want to reinvest their money from a more hands-on property into a hassle-free triple net leased property.
Contact FGG Services to get access to our entire inventory of 1031 DST properties for sale and use FGG Services for your 1031 Exchange!
BIO : Paul Getty
Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $2 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student and senior housing.Paul Getty’s transaction experience includes buy and sell side representation, sourcing and structuring of debt and equity, work-outs, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions.Paul Getty also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals.
Prior to founding First Guardian Group/FGG1031,Paul Getty was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 25 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M.
Paul Getty holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. He is a member of Institute of Real Estate Management (IREM), a Certified Property Manager Candidate (CPM), and a member of the US Green Building Council.Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered representative with LightPath Capital Inc, member FINRA /SIPC .
Paul Getty is a noted speaker, author, and actively lectures on investments and sales and management related topics. He is author of The 12 Magic Slides ,Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors , and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.
This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This material contains information that has been obtained from sources believed to be reliable. However, FGG1031, First Guardian Group, LightPath Capital, Inc., and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies, declining market values, potential loss of entire investment principal.
Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect. The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. All financed real estate investments have a potential for foreclosure. Delaware Statutory Trust (DST) investments are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments. Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions. Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits.
IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes; therefore, you should consult your tax and legal professional for details regarding your situation. Securities offered through registered representatives of LightPath Capital, Inc. Member FINRA / SIPC. FGG1031, First Guardian Group, and LightPath Capital, Inc. are separate entities.
DST 1031 properties are only available to accredited investors (generally described as having a net worth of over one million dollars exclusive of primary residence) and accredited entities only (generally described as an entity owned entirely by accredited individuals and/or an entity with gross assets of greater than five million dollars). If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney prior to considering an investment. You may be required to verify your status as an accredited investor.