NNN Investing: Triple Net Leased Commercial Properties -- What are they and are they for you?
Are your real estate investments giving you a management headache?
Are you tired of tenant complaints and property destruction? As a real estate investor, are your goals security and predictable, partially tax-sheltered income with an inflation hedge? If so, then Commercial Triple Net Leased property is an excellent vehicle to create wealth through real estate. This investment requires little or no management, has little risk, and produces monthly income from Lease payments. The Lease Agreement can also provide the opportunity for rent increases as a hedge against inflation.
How this does differ from owning other investment property?
Unlike owning duplexes, apartments, land or an office building, owning a commercial property under a Triple Net Lease Agreement to a business tenant is a passive investment --- management and headache free! In other real estate investments such as apartment buildings, rental houses, mini-storage facilities and office buildings you as the property owner must perform the property management duties and pay all operating expenses. You rent the property, collect the rents, refurbish the premises, pay the property taxes, insurance premiums, maintenance, accounting, legal, and other operating expenses. Whereas, under a Triple Net Lease arrangement the Tenant agrees to perform all these functions for you as the owner of the property in return for a long-term Lease Agreement. With the ownership of commercial property under a Triple Net Lease arrangement, the Tenant operates his business and pays all expenses (tax, insurance, maintenance) in that location for the duration of the Lease Agreement. This type of real estate investment is passive, similar to owning stocks. And you receive the dividends or, in this case the rent payments, monthly. Further, these types of commercial Tenants are positive business renters. Unlike apartment renters who tend to abuse the property and then move out leaving the owner to refurbish and to find new renters, commercial Tenants have a vested business interest in seeing that a location is well maintained and attractive to customers.
How do these properties become available?
Many large corporations prefer to lease rather than own their buildings for two reasons: They can only depreciate the cost of the building over 39 years and it remains as a long-term debt on their books. The monthly Lease payment is written off as an annual business expense on their tax return. Therefore they often choose a prime business location and have a building custom built in their normal architectural design (Taco Bell, KFC, CVS, etc. ). They then sell that building with a long-term Lease in place. Very often the builder will retain ownership of the land and building and sell it in the second year of the Lease for long-term Capital Gain. Or owners of these properties may want to cash out for various reasons --- estate settlements, a need for cash or for a Tax-Free Exchange. Also large Real Estate Investment Trusts (REIT's) with hundreds of thousands of dollars available from their investors will buy a whole chain of Net Leased properties, hold them for a short time and then "flip" them for a higher price. The properties are listed with various large brokerages around the country that specialize in Triple-Net Leased properties. They in turn to make them available to commercial brokers throughout the U.S. such as aTRUST realty, who then contact investor/clients in their area.
What are some examples of Commercial Triple-Net Leased properties? The drugstore chains such as Walgreens, Eckhard's, CVS, Rite-Aid. Restaurants and fast food chains such as Arby's, Applebee's, Shoney's, KFC, Burger King, Chili's, Jack-in-the-Box, Mrs. Winners, Captain D's., Buffalo Wild Wings. Other examples are Dollar General, Wal-Mart, Verizon Wireless, Hi-Fi Buys, Circuit City, Auto Zone, Blockbuster Video, IHOP, Office Depot, OfficeMax, Home Depot, Staples, Kmart, Payless ShoeSource. They have all been available to investors in the past year.
What are some of the advantages of a Triple Net property?
There are several advantages. First, the monthly Lease arrangement provides a very predictable, long-term income stream to the property owner. Second, since there are no property expenses (taxes, maintenance, or insurance) to be deducted, the income stream is not impacted by future increases in property operating expenses. Subject to the credit worthiness of the Tenant and the terms and conditions of the Lease agreement, the investor can enjoy a high degree of security and should have additional rental income over time as the inflation hedge features of the Lease Agreement comes into play.
Can a Triple Net property be used to complete a Real Estate 1031 Exchange?
Yes. A Triple Net Leased property can be an excellent replacement property in completing an Exchange transaction. Many real estate investors dispose of their management-intensive properties such as rental houses, apartment buildings, duplexes, and office buildings, hoping to find management-free properties producing long-term, predictable income. If you are thinking of disposing of your business or investment-held property, would like to pay no capital gains tax and reinvest into a management and headache-free property, the purchase of a Triple Net Leased property through a Real Estate Exchange can be just right for your investment portfolio.
What about financing? Most investors will purchase a Net Leased property by leveraging their cash outlay --- putting twenty percent down and obtaining an eighty percent long-term bank loan (15 to 20 years). Because of the financial standing of the credit tenant, these loans are usually obtained at a more favorable interest rate and a lower down payment than with other types of business loans. This allows the investor to acquire the property with fewer dollars up front.
What sort of percentage return could I expect from a Net Leased property?
You calculate your return on your cash down payment in two ways:
1) Your cash balance after you have received your monthly rent check and paid your monthly note payment. This will usually be 7 to 10 percent (or more) on an annual basis of your cash down payment and will depend on the "Cap Rate", the percentage of rent received annually divided by the price paid for the property. Most Cap Rates on properties we would recommend are currently running between 7.25% and 8.5%.
2) Your monthly equity buildup on your mortgage payment (The "principal" part of the interest and principal). This should also be another 7 to 10 percent (or more) of your cash down payment. Adding the two together, your total annual return typically will be fourteen to twenty (or more) percent on your cash down payment starting your first year and increasing steadily year by year as the interest portion of your note decreases and your tenant's scheduled rent increases come into play. By about the tenth year it may be 25% to 30% of your down payment. By year 15 it could be as much as a 40% return!
Can aTRUST realty find Triple Net properties in any area? Although most Delaware Valley area investors prefer properties which are not more than two to three hours driving time from their home, we have recourse to a wide range of properties at varying prices (starting at @ $350,000) in all areas PA, NJ and DE.
How does aTRUST realty get paid?
aTRUST realty receives its compensation as a commission at the close of escrow from the seller of the property you purchase. Its services are available to you with absolutely no financial obligation on your part.
What is the procedure when I choose a property I would like to buy?
First we submit a Letter of Intent to the seller's agent. This document is not legally binding on either the buyer or the seller. It simply states the price you are willing to offer for the property and contains the following conditions:
1) Your inspection and approval of the property.
2) Your inspection and approval of the Lease.
3) Your ability to obtain a satisfactory financing. There is no Earnest Money deposit required.
Do I need to inspect the property first?
No. Since desirable Triple Net properties are normally in short supply and usually on the market a very short time (sometimes only a few days) many investors submit a Letter of Intent as soon as they know there is a property they would like to acquire. Upon acceptance of their offer they will have a thirty day period to inspect and then accept or reject the property.
What is the next step if we agree on the selling price?
You will then sign a Purchase and Sales Agreement and forward it to the seller with your Earnest Money deposit. This agreement is legally binding on both parties and will include the conditions listed in the Letter of Intent. You will have thirty days or more after the seller signs the agreement to inspect the property and to obtain a loan commitment. A copy of the Lease will be furnished so that you may review it with your legal counsel. If after your inspection period you do not choose to purchase the property you will so notify the seller. You are not obligated to give any reason for your withdrawal. Your Earnest Money will be returned and you will have no further obligation.
What is the final step if the price is right, I like the property, the Lease and the conditions?
As with any real estate transaction you will then go to closing, usually thirty days or less after your inspection period. The escrow and closing may possibly be in a city other than that in which your new property is located. Your attorney can obtain the closing papers for your signature by mail or fax and funds will be transferred by wire. The current month�s rent check will be prorated and credited to your account. After that you will receive your monthly rent check directly from your Tenant.
If this type of investment is of interest to you and you would like more information regarding available properties, please Contact Us.
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