Blog

What does the term “Zero cash flow property” imply?

Nowadays, the popularity of Zero Cash Flow Property NNN investments – leasehold or fee simple – is rapidly increasing amongst commercial real estate investors all over the globe. As the name suggests, “zero cash flow property” or “zeros” refers to the fact that the investor – in such a flow NNN Lease Property – does not receive any cash flow of income from the property until the underlying loan matures in full. In simple words, the loan payment on the investment property is equal to the net operating income of the property, hence “zero cash flow”. In such investment properties, the net operating income directly assigns to the lender to pay off debt taken on to purchase the property. Zero cash flow property is usually highly leveraged with a long term lease (at least 20 years) secured by the investment grade credit rating of a tenant. 

Although, prime facie, a zero cash flow property might not look lucrative  to investors, there are circumstances and reasons where such an investment makes eminent sense:

• Use as 1031 & 1033 Exchange property: The most striking advantage of Zero Cash Flow Property is that you can utilize them as 1031 (& 1033) Exchange property. A 1031 Exchange allows investors to defer capital gains and recapture taxes after the sale of foreclosure or highly leveraged assets by reinvesting the capital gains in any highly leveraged assets like a Zero cash flow NNN lease.
• Highly Predictable investment: The debt financing in zero cash property is non-recourse, predictable, fixed rate and conventionally amortizes over a term that can be shorter than the underlying lease term.
• Low equity, High Leverage investment: Investors usually purchase a zero cash NNN lease property with equity as low as 10% – 15% of the net value of the asset.
• Phantom income and tax: Zeros produce phantom income when the principal being paid down on the debt exceeds the deductions for depreciation and interest. This typically starts in years 15 -16 and is paid for with inflation-adjusted dollars (historically $.58 on the dollar). To accurately calculate the amount of phantom income, the basis and deprecation from the relinquished property must also be used.  Because leaseholds can be 100% depreciated they have less potential phantom income vs fee simple zeros, when the loan principal pay down starts to exceed the interest and depreciation deductions.
• Residual value: When the lease term expires and debt is fully amortized, the landlord investor gets to benefit from secure cash flow and enhanced residual value.
• 1031 One time Pay Down Re-Advance facility:  The pay down re-advance facility found in many zeros allows 1031 investors to satisfy their exchange requirement for replacement property then, post-closing, allows them easily and with no additional cost, take up to 92% of their cash out of the property for other uses. To use the pay down re-advance facility, investors need to post a refundable deposit with the lender with non-exchange dollars. 
• Short Closes:  Close times can be as short as ten days, further making zero cash flow property appealing for time sensitive situations.

However, in the world of commercial real estate, the term “perfect” investment is a myth.   The kind of commercial real estate property investment  that is “best” for an investor is one that is consistent with your risk tolerance and investment goals. Therefore, call your trusted commercial real estate NNN brokers and experts at Triple Net Investment Group! We can help you evaluate prospective zero cash flow property and significantly minimize risks.

NNN or Triple Net lease property is not a new concept for commercial real estate investors, brokers, landlords and tenants. Yet, it is one of the most misunderstood terms by many NNN brokers and NNN investors . To be clear about the different sorts of NNN leased properties a basic understanding of net lease properties  is proposed below: .

Types of Net leases in the United States

Commercial real estate tenants, investors, brokers, owners and landlords have a wide array of net lease property (N, NN, NNN) options available to  them. Here are some of the most common ones  :

• Single Net (N) Lease: Single or N lease is the most basic type available in the commercial real estate market. Here, the N lease tenant  is responsible for paying both the rent as well as the associated property tax. Lesser known as compared to other net lease types, it enables the commercial property landlords and owners to pass on incidental property expenses to the tenant .
  
• Double Net (NN) Lease: Double net or NN lease, is the most popular of all the options available in the market. Under this net lease contract, a tenant  needs to pay both the building insurance as well as property taxes, in addition to the rent. In this case, maintenance expenses lie entirely with the landlord/owner. In addition, the commercial property landlord or owner  also bears the costs of structural repairs. .
  
  
• Triple Net or NNN Lease: This type of net lease is the favorite of NNN Property landlords, owners and investors. s. It requires the NNN tenant  to pay both the incidental expenses as well as monthly rent. Real property tax, maintenance, regular repairs, and building insurances are some of the additional charges borne by  the NNN lease tenant .
  
  
• Bondable or Absolute Net Lease: Bondable net lease or absolute triple net NNN lease represents the extreme case of a NNN lease property. Here, the Triple Net tenant  has to completely bear  all property-related expenses. In this way, the NNN tenant  assumes responsibility all transparent and unknown  property related costs. .  Damage repair costs incurred on account of accidents, tourism or vandalism are a good example of “unknown” property costs. This type of lease needs the Triple Net tenant  to abide by stringent contractual guidelines, and hence a prospective NNN tenant  should undertake an Absolute Triple Net lease only after  considerable due diligence. .

What does it mean when someone refers to an NNN lease?

A NNN lease, also known as a triple net lease is the lease structure wherein a tenant is held responsible for making payments of rent and some or all of the costs of operating, maintaining and owning a commercial property.  Commercial real estate professionals generally refer to it as a “turnkey” investment. Property owners are absolved of  bearing  a commercial real estate property’s operating expenses in a Triple Net  lease.

Risks of NNN lease properties

Although commonly and mistakenly considered risk-free, tenant credit is the most significant risk to understand, when investing in or owning a NNN lease property.

Benefits of NNN lease properties

A NNN lease property comes with numerous advantages for landlords and offers a steady and predictable income flow for a long time. Usually, the length of an NNN lease ranges from 10 years to 15 years. Thus, landlords do not need to rush to find tenants every year! The other advantages of an NNN lease are as follows:

• Stable Cash Flow: As NNN properties are leased for a long term, landlords can get a stable flow of rental income. The leases typically span for 10 to 20 years so the Triple Net Lease Buyers are guaranteed stable, positive, cash flow until the lease expires.
  
  
• Reduced Maintenance Liabilities: Another superb advantage of NNN lease properties is the minimal maintenance and repair responsibilities on part of the landlord. In addition to the monthly rent, the tenant in an NNN lease property is also responsible for all operating expenses related to the Triple Net leased property. Starting from building insurance premiums, property taxes, to all the maintenance and repair costs – the tenant looks after all possible costs associated with operating and maintaining the property. Thus, landlords are now involved passively, rather than actively, in the management of the property, leaving them plenty of time and energy to focus on lifestyle or other projects.  .
  
• Financing Options: Whether personal or bank lender, all lenders typically give preference to investors, owners, landlords or tenants of  Triple Net properties. This is because of  predictable cash flows due to institutional grade tenants and long lease terms. Additionally, single tenant NNN lease properties provide a lot more and  varied  financing options for  Triple Net Lease Buyers.
  
• Simplicity: This is another attractive feature of a Triple Net lease property, which makes it popular among nnn lease investors. The NNN lease clarifies the responsibilities of the involved parties, whether the tenant or the property owners, right upfront. The relationship between the tenant and the landlord thus remains healthy as there are fewer issue of negotiation that are non-standard.
  
  
• Tax Benefits: An NNN Buyer can enjoy the ownership of an asset by avoiding capital gain taxes by using NNN lease and depreciation schedules under US Tax regulations as a means of lowering the property taxes. 

Please feel free to contract one of the experienced nnn brokers of Triple Net Investment Group Inc with questions before investing.

We will distinguish a Ground Lease, which is related but different, from a Triple Net NNN Lease.  A Triple Net lease or a NNN lease provides a stable income to the investor, landlord or owner, with least management responsibilities. When landlords, owners or investors choose a Triple Net lease structure, they are most likely thinking of a commercial property comprised of creditworthy, national tenants.  

What is a Ground Lease? ( Land Ownership)

A Ground lease is a long term agreement between the tenant and the owner with respect to the use and lease of the land. In this, the tenant is allowed to construct a property over the land during the lease tenure, up to 99 years. By the end of the ground lease term, the land with all the improvements is now owned by the property owner, until and unless an exception is created. By the end of the NNN lease, the ownership of any building constructed by the tenant is transferred to the owner of the land.

What is a Triple Net Lease? ( Land and Building Ownership)

On the other hand, in a Triple Net NNN lease. Landlord leases the land and the building he owns to the tenant. The tenant makes an improvement to the building and starts his business and pays for all repairs and maintenance. The biggest benefit of a NNN lease vs Ground lease is that in NNN lease landlord gets to depreciate the building vs the ground lease while the tenant gets to depreciate the building.

Ground lease vs NNN fee simple 

• A NNN fee simple property conveys the rights of owning the land outright, as well as the rights to develop and tenant the land (and building), without condition of time or any other.   
• Ground leases do not convey the rights of ownership of the land, only tenancy of the land is “sold” for a long term upto 99 years.  In the sense of unconditional ownership, it is inferior to a NNN lease fee simple, but can be better than a Triple Net lease only.   

Investing in ground Leases or Net Leased Real Estate

Technically speaking, a ground
Lease is a refined form of a Triple Net Lease. Both types of leases have
investing nuance that requires deep analysis and understanding, by contacting and engaging NNN Triple Net brokers. 

For the pursuit of happiness, investors prefer making investments in triple net lease properties to ensure solid guarantee returns on the investments with zero landlord responsibilities. Triple net lease buyers can invest in leasehold properties or ground lease properties. In this article, we will compare both options and involved pros and cons.

What is a leasehold property?  (Building Ownership)

With leasehold, you actually own the improvement, however, not the land. This agreement extends up to the duration that has been agreed upon. After the lease expires, the landlord gets its ownership back unless the lease is extended.

Important things to consider on leasehold properties

When you buy yourself a nnn leasehold property, you’ll be taking over the lease from the previous leasehold owner. So, before making any offer and coming to an agreement, you need to consider the following:

• The number of years left on the lease.
• The internal rate of return for the time you have the ownership
• How will you budget for service charges and related costs?
• The length of the lease which may affect getting a mortgage and resale value.

What is a ground lease property?  (Land Ownership)

A ground lease is an agreement in which, a tenant signs and lease a piece of land and develop it for its business and agrees to pay a certain rental rate. Tenant also agrees to maintain the property and pay for insurance, property taxes and all other charges related to the property. At end of the lease all the improvements is turned over to the owner of the property. Most leases indicate that the improvements will be owned by the property owner unless an exception has been made. Since a ground lease allows the NNN landlords to take charge of all the improvements once the lease period is over, the landlord may sell the property at a much higher rate to the tenant or other investors.

Why investors choose ground lease properties vs leasehold properties?

A tenant can build on the property in a prime location that he could not purchase. Hence, large chain stores often take advantage of ground leases in their plans of corporate expansion. Also, a tenant doesn’t have to pay any down payment for securing the land, as purchasing the property would have. Evidently, this frees up enough cash that the tenant can use for other purposes.

Furthermore, the owner of the land can gain a steady flow of outcome from the tenant while retaining ownership of the property. Normally, there is an escalation clause that guarantees an increase in rent and eviction rights that provide protection in case of default on rent or other expenses.

Hence, before making any investment, it is wise to be well aware of all available options with different types of triple net lease properties. This enables you to make best-suited choice. Triple net lease buyers should know all the involved pros and cons before proceeding with Triple Net lease properties.

Please feel free to contact one of the advisors of Triple Net Investment Group Inc with questions before investing.

Triple Net Lease Properties nowadays are becoming popular among investors in commercial real estate. Triple Net Lease Properties may include office buildings, industrial parks, restaurants, retail and many others. However, unlike the traditional gross lease properties, in a triple net property, the tenant takes care of all the operating expenses related to the leased asset. One of the several reasons why NNN Lease Properties make a good investment is its simplicity and flexibility in term of management and payment.

Why is it beneficial to invest in Triple Net Properties?

Notably, NNN Lease Properties allow the tenants to take ownership by removing the landlord from all the responsibilities related to property management. The tenant becomes solely responsible for paying building insurances, taxes, and structural maintenance charges including the monthly rent to the landlord. Nevertheless, Triple net properties offer many benefits to the landlord as well, with lucrative income and security.

The following list sheds lights on the beneficial factors of investing in a NNN Lease property.

• Stable and Predictable Income Cash Flow: One of the primary reasons for the growing popularity of the Triple Net Lease Properties is stable cash flow. The long-term lease agreements of NNN properties guarantee a lucrative cash flow to the landlords with less risk factor. Therefore, investing in a single tenant property with a triple net lease seems an ideal investment choice for the landlords. They do not need to search for new tenants every single year as the length of NNN Lease ranges from 10 to 15 years.
• Zero Landlord Responsibility: Another attractive benefit of investing in NNN Lease Properties is zero landlord responsibility within the lease time frame. Triple net lease puts the entire burden of the leased property on the shoulder of the tenant. As a result, the landlords do not have to worry about or look after any property related issues after purchasing a triple net lease property.
• Little to No Maintenance Liability: In the case of Triple net properties, the tenant manages and handles every ongoing operating cost of the leased property starting from property repairing, maintenance to taxes and insurance. Therefore, the property owners do not have to deal with any repairing or maintenance issues and complaints. They simply enjoy the lucrative amount of monthly rent coming from the tenant.
• Financing: In the field of commercial real estate, the lenders prefer to finance NNN Lease Properties, as these assets offer stability in terms of predictable cash flow from the reliable long term tenants. Evidently, the investors or the landlords get the additional options in commercial financing.

Hence, investing in Triple Net Lease Properties can be highly profitable for the real estate investors seeking a great cash flow and stability. To help you in this important venture, seeking the assistance of an experienced nnn broker is really the key to success. A NNN broker can help close the most complicated deals and guide the investor through the transaction and make the transaction a worry free transaction.

As the name implies, a Single Tenant NNN property is leased to one single business entity on the basis of a long term lease. On the other hand, multi-tenant properties like shopping malls or centers offer multiple spaces for different commercial purposes to different businesses. In commercial real estate, Single Tenant NNN Lease Properties are getting more popular amongst investors versus Multi-Tenant properties. It is important to note that most Single Tenant NNN properties that are on the market come with existing leases, so you are beholden to what the current or a prior landlord agreed to with the tenant.

There are many reasons for choosing a Single Tenant NNN lease property over a Multi-Tenant NNN Lease Property:

Certainty of cash flow

Typically, a Single Tenant NNN property lease ranges from 10 to 25 years. Therefore, a NNN Lease Landlord or investor receives a predictable rental income from the single tenant for a long time, given that the underlying tenant business has good predictability of cash flow. Even when compared to other real estate investments, the cash flow is more predictable in NNN properties, this is because the rental rates rely on a long term lease agreement and the tenant pays for all the operating costs of the property. On the other hand, a multi-tenant NNN property has component leases that only last between 1 to 7 years. Thus, a Multi-Tenant NNN lease landlord or investor has to advertise more often and find tenants to fill vacancies, in addition to offering new rent abatements, build-out concessions and bearing “lost rent” for downtimes between tenants.   In addition, the landlord or NNN property investor also must negotiate with multiple tenants that possess differing risk profiles.

Maintenance

Another significant advantage of owning a Single Tenant NNN lease property is the lack of shared common areas and therefore lowered landlord responsibilities.  This is important because the landlord must maintain the property’s common areas, regardless of who bears the financial burden for that work under the tenants’ leases.  Common areas may include trash areas, hallways, courtyards and lawns. Maintenance responsibilities may be relatively simple, such as lighting and sweeping or shoveling/salting a common sidewalk in front of a property, or they may be more complicated in nature. The more tenants residing at the property, and the more amenities offered there, the more complex and potentially costly and time-intensive these obligations may become, especially costs related to parking lots, lobbies and amenity spaces. 

Tenancy Risk

This factor is closely tied to predictability of cash flow from the NNN leased property.  If a property is Single Tenant NNN lease, the success of the investment is dependent on that tenant’s prompt payment and diligent performance under its only lease. Plus, investment risk can be mitigated by ascertaining the tenant’s credit before purchasing a leased property or entering into a new lease. It can also be mitigated by securing a lease guaranty collaterized from another source such as the tenant’s parent company. A security deposit may also be negotiated. Advance preparation for lease expiration is critical for a single-tenant NNN property, especially if there is a mortgage on the property, as the loss of rental income can trigger a loan default. Commercial tenants frequently make leasing decisions on their own corporate timeline rather than the landlord’s. Further, tenants often request lease concessions before committing to renew. When evaluating these requests, the investor should consider the strength of the overall market and economy, as well as the time and cost of finding a new replacement tenant if owner and tenant are unable to reach an agreement with the current lessee.  

In the case of a Multi-Tenant NNN lease property, if the property’s rental units differ in size or vary in features, a tenant’s ever-changing needs may be met by relocating them within the property, rather than having to make significant capital improvements to their space or losing them as a tenant entirely. Further, lease expirations may be staggered, thereby minimizing the risk of vacancies. As each space in the property comes up for re-leasing, the parties have the opportunity to adjust rental rates in accordance with the current market.

Exit Strategies

Savvy investors will consider when and how they will be able to exit an investment before buying the property. As noted above, if there is only one tenant, the property will either be fully occupied or completely vacant. The sale price will be higher if there is a quality tenant in place.

Single-tenant NNN properties have a few logical points of exit:

• concurrently with lease expiration,
• shortly after the tenant’s term is renewed (or a new lease is executed), or
• a financeable amount of remnant term (5, 7 or 10 years).

Selling at another time may be possible, but doing so may be less profitable because the buyer will need to bear the risk of re-tenanting the property and/or the expense of tenant improvements for a new lease. Additionally, if there is a mortgage on the property, there may be significant prepayment penalties if the property is sold prior to loan maturity.

Multi-tenant properties are less likely to be vacant at any given point in time.  They, therefore, have greater flexibility in the timing of an exit, so long as all or most of the leases do not expire concurrently.   The execution of a new lease with one or more significant “anchor” tenants, or positive developments in the commercial real estate market, such as the opening of a new demand driver for the property, may also provide a good opportunity to sell.

ADDITIONAL CONSIDERATIONS

• Multi-tenant NNN properties require the investor to manage the property, etc. If the investor opts to hire a property management company to perform these tasks, such costs must be considered.
• Multi-tenant NNN leases require major structural maintenance and replacement costs and these will fall on the investor to cover. E.g. the roof, electrical systems, heat and air conditioning, and plumbing, all big dollar costs.
• Lenders may be more reluctant to provide financing for multi-tenant real estate investments because such NNN leases are typically shorter than Single Tenant real estate leases. Tenants are often less creditworthy than single tenants and have a higher turnover. These factors increase the risk factor for a lender and as a result, a lender may charge higher interest rates as compared to financing a single tenant real estate investment.

Commercial real estate provides NNN triple net lease investors amazing opportunity. At the Triple Net Investment Group, we have brokers, specialists and experts that focus exclusively on NNN net lease investment property. We welcome you to contact us and speak with one of our specialists to learn more how we can help you evaluate, negotiate, acquire, close and 1031 exchange out a NNN investment property in all states of the Union.

NNN Buyers can invest in Corporate backed Triple Net NNN properties or, in Franchisee leases. National corporate retailers and restaurants, are revamping their expansion models to prevent large capital outlays by franchising more locations. Hence, a more nuanced look at the benefits of NNN leases with either corporate backing or franchisee backing, is desirable.

CORPORATE OWNED NNN LEASE PROPERTIES

• Corporates offer better credit – than franchisees, giving greater ability to investors to conserve capital and have greater predictability of income cash flows.
• Corporates will back their leases and not use Assignment clauses, typically.
• Corporates have better termination and destruction clauses in their NNN lease contracts.
• Corporate NNN lease properties will trade at lower but more stable, less risky cap rates vs. franchisee lease properties

FRANCHISEE OWNED NNN LEASE PROPERTIES

• With higher cap rates on offer by franchisee NNN lease properties, investors need to consider the return, adjusting for risk.   Franchisees, after having sold off their real estate at the height of the market in the decade prior, have been investing in real estate based expansion due to favorable cap rates for land deals. This said, franchisees have been facing strong online competition and this is causing them to be more selective with sites and operators, and are now more sales/performance focused. 

• Since a majority of franchise net-lease properties are priced below $2.5 million, they’re quite ideal for all-cash buyers using 1031 tax-deferred, “Starker” exchanges.

Financing issues

• NNN investors should note that lenders are cautious when it comes to properties that are leased to franchisees. Triple Net lease investors who plan to use debt to acquire franchise net-lease properties should be prepared to contribute between 50% and 60% equity.    In addition to a franchisee’s experience and financials, investors need to pay particular attention to the value and momentum of the franchise and brand in the marketplace.  
• Assuming a franchisee is a newly formed entity having no value or assets other than its franchise rights, a landlord or investor should request and review the financial statements of the principals of the franchisee and obtain a personal guaranty, which provides the Triple Net NNN landlord or investor with a reasonable level of comfort.

For better insight into the pros and cons of any type of NNN lease investment, discussion with your expert Triple Net NNN lease broker at the Triple Net Investment Group is always advisable.

In a 1031 exchange (STARKER exchange) process allows an owner to sell one investment property and buy another similar (“like-kind”) property whilst avoiding U.S. capital gains tax.  The major pitfall occurs when an exchange is audited and disallowed. The penalty standards include the income tax related to the sale of the relinquished property and the penalty and interest imposed on the underpayment of taxes.

Here are the salient aspects of this tax rule, in very basic terms:

• Identify the replacement property within 45 days and complete the transaction within 180 days.
• The replacement property must amount to an equal or greater value than the one sold.
• 1031 exchange eligibility is completed by fulfilling any one of 3 further rules, the Three-property rule, 200% rule, or the 95% rule.

Triple Net Investment Group brokers will help you make the absolutely right investment that will meet all 1031 exchange criteria. Our experts will also suggest an appropriate intermediary. Moreover, Triple Net Investment Group expert advisors will help you deliberate pitfalls in a 1031 exchange, such as:

• Choosing the right properties: The investor must be very careful when choosing multiple properties under a 1031 exchange. Choosing the right properties, which will specifically fulfill the Three-Property rule, is very important. This rule – the most popular rule in use – covers three of the properties chosen, regardless of their value.

• Establishing clear property title: The exchange intermediary must be vigilant about establishing the true owner of the property before proceeding. This will help to screen and verify ownership of investment properties, avoiding fraud and title clouds.   
  
  
• Receipt of excess funds: it is permissible for the 1031 exchange agent to return to the exchanger, the proceeds of the sale exceeding the value of the replacement property. This is, however, possible only if the investor has completed the transaction or, does not have enough funds to conduct another purchase. Under all circumstances, the 1031 exchange investor should keep a proper receipt of the excess funds for future use.

Interested in a 1031 Exchange? Contact the experts at Triple Net Investment Group for more information.

The 1031 Starker exchange, gives the owner of the right to sell a property and buy a similar one, by deferring capital gains tax and avoiding penalty taxes, that might otherwise accrue.  It is crucial to recognize that each and every minutia of due process in such exchange must be completed, otherwise significant penalties can ensue.   Moreover, the IRS provisions under section 1031 only pertain to properties used for investment or business, NOT for personal use.  Also, when undertaking a 1031 Exchange, both the purchase price and the loan amount on the replacement property must be equal to or greater than the exchange property.

A 1031 exchange is of 4 basic types: Simultaneous, Delayed, Reverse or Construction/Improvement, with the most common one being a “Delayed” exchange where the original property is sold prior to the identification and purchase of a replacement property.   

USE OF A QUALIFIED 1031 INTERMEDIARY  

Department of Treasury regulations IRS clearly state who can and cannot act as a qualified intermediary or QI (the 1031 exchange facilitator).   In general, those persons who are agents of the taxpayer cannot do so; the regulations refer to those prohibited persons as a “disqualified person[s].”

“DEFINITION OF DISQUALIFIED PERSON:  (1) For purposes of this section, a disqualified person is a person described in paragraph (k)(2), (k)(3), or (k)(4) of this section. (2) The person is the agent of the taxpayer at the time of the transaction. For this purpose, a person who has acted as the taxpayer’s employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the 2-year period ending on the date of the transfer of the first of the relinquished properties is treated as an agent of the taxpayer at the time of the transaction.”

The definition of an agent of the taxpayer in the rules makes clear that, if a professional advisor to the exchanger has provided services within two years preceding the exchange, the advisor is now a disqualified party.

The role of a QI is defined in Treas. Reg. §1.1031(k)-1(g)(4).   In most circumstances, the use of a qualified intermediary is required to successfully complete an IRS Section 1031 tax-deferred exchange. DOT Regulation §1031.1031(k)-1(g)(4)(iii) refers to the entity that facilitates a 1031 exchange as a “qualified intermediary”.

A QI or 1031 exchange qualified intermediary is also referred to as an accommodator, facilitator, intermediary, which is further clarified below:

1) A Qualified Intermediary (“QI”) is a person who:

• Is not the taxpayer or a disqualified person;

2) Enters into a written agreement with the taxpayer (the exchange agreement) under which the QI:

• Acquires the relinquished property from the taxpayer;
• Transfers the relinquished property to the buyer;
• Acquires the replacement property from the seller;
• Transfers the replacement property to the taxpayer.

3) The exchange agreement must expressly limit the taxpayer’s rights to receive, pledge, borrow, or otherwise obtain benefits of money or other property held by the qualified intermediary. (Per Treasury Regulations §1031.1031(k)-1(g)(4)(i))

The use of the “right” qualified intermediary can significantly reduce the headaches of an exchange by assuring the proper execution of all documentation.  Note that the QI or qualified intermediary industry is not regulated nationally. Hence, the careful selection of a qualified intermediary is essential to a smooth and penalty-free 1031 exchange transaction.

LIKE-KIND

To qualify as a 1031 exchange, the property being sold and the property being acquired must be “Like-Kind” property.  This is a very broad term which means that both the original and replacement properties must be of “the same nature or character, even if they differ in grade or quality.” In other words, you can’t exchange farming equipment for an apartment building, because they’re not the same asset.  (For the 1031 exchange code to apply, both the relinquished property and the replacement property must be located in the U.S.)

SAME TAX PAYER

The tax return, and name appearing on the title of the property being sold, must be the same as the tax return and title holder that buys the new property. However, an exception to this rule occurs in the case of a single member limited liability company (“smllc”), which is considered a pass-through to the member. Therefore, the “smllc” may sell the original property, and that sole member may purchase the new property in their individual name.

E.g., the single member of “Tom Thumb LLC” is Tom Thumb. The LLC can sell the property owned by the LLC, and because Tom Thumb is the sole member of the LLC, he can purchase property in his name, and be in compliance with 1031 code.  Know that in a 1031 exchange transaction it is important to stick to the formalities of each person within an ownership signing all applicable documentation.  Failure to do so will nullify the exchange.

CONSTRUCTIVE RECEIPT

A taxpayer cannot take actual possession or be in control of the net proceeds from the sale of a relinquished property in a 1031 exchange. For tax purposes, the taxpayer does not receive payment, rather those funds are held towards a replacement property to complete the exchange.  Should no replacement property emerge at the end of the 180-day exchange period or no property be identified by the end of the 45-day identification period, the funds can be received, and the sale would be reported as such. 

EARNEST MONEY PAYOUTS

Taxpayers often provide earnest money at the time the replacement property is contracted for purchase.  Prior to the closing of the replacement property purchase, typically, the taxpayer will request a reimbursement for the earnest money.   However, under 1031 exchange rules, a taxpayer cannot receive a benefit (much less a payment) from the exchange account. 

RETURN OF EXCHANGE FUNDS

Commonly, during the exchange period, a taxpayer may elect not to proceed with the transaction and request return of exchange funds.  Under 1031 regulations, QIs are only permitted to disburse funds at specific times for specific reasons.  The election by the taxpayer to terminate the account is not one of those instances. 

NOTICE TO ALL PARTIES

In a 1031 exchange, the taxpayer assigns his rights for both the sale of the old property and purchase of the new property to the qualified intermediary. Under safe harbor exchange procedures, the taxpayer must give notice in writing to ALL parties to EACH contract of the assignment of rights to the qualified intermediary. 

Interested in a 1031 Exchange? Contact one of our advisors of Triple Net Investment Group Inc to get started.

The Triple Net or NNN Lease property is one of the most common kinds of commercial real estate leases.  These properties seem simple to investors and hence are the top amongst a slew of widely preferred, realty, investment options. It leaves the entire burden of expense and operation on the tenant rather than the owner. Investors give preference to NNN lease properties as all they have to do is: bookkeeping, tax returns, and deciding when to refinance the property.  Typically,  investors want and expect assured income with little to no burden of management. However, as an investor, one needs to consider the benefits versus certain risks while making this investment:

Benefits of Triple Net lease Property

Predictability: After signing the net lease agreement, the parties get the structure and the terms of lease for the entire term. This clarifies the amount of the rent and income per year and for the entire term. The investor benefits greatly because even if the operating tenant entity goes bankrupt, he is liable to pay the amount under lease, owing to signed personal guarantees included in the NNN lease.

Stability: Choosing an investment grade or “good” credit tenant, contracted within a long-term net lease greatly minimizes  the   default-risk. Landlords don’t have to worry about finding new tenants every year and having their buildings vacant for months at a time.

Simplicity: The owner does not have any responsibility toward management or any property maintenance.   Hence it makes NNN lease property ownership very easy.

Financing options: With most real estate properties, loans are written against the value of the property. NNN Single tenant properties, on the other hand, are a little different. Because a NNN single tenant property is also collateralized against a tenant’s credit as much as against the intrinsic value of the property, investors have greater financing options available to them.

Risks of Triple Net NNN lease Property

Tenancy Risk: When a tenant’s credit gets downgraded due to financial mismanagement, , the property’s value also falls. When the tenant is unstable the tenancy risk factor, increases and conversely. Further, an investor needs to understand the risk of default, and the degree and extent of contribution of underlying franchise contracts to tenancy risk.

Market risk: Before finalizing an investment  property, due diligence research is a pre-requisite.  Investigate the property’s financial history and its future scope in light of the real estate market and the underlying business markets to which the tenants are affiliated.

Expense Risk: to the extent that tenants are responsible for operating expenses of the property, the risk is that tenants won’t maintain the building sufficiently, thereby eroding the overall value of the NNN lease property. 

Leasing/Contract Risk: short term leases, the absence of adequate rent increases, termination, assignment, and destruction clauses in tenant/owner agreements – are some major potential components of leasing risk that need to be closely examined by any investor in a Triple Net NNN lease investment.  

Considering all these benefits and risks, investors will find that investing in Triple Net NNN lease property is very appealing. Investors looking for a stable, passive, income will greatly benefit from investment in NNN lease properties by contacting your expert advisors at the Triple Net Investment Group.

A Triple Net NNN Lease Investments is a commercial property lease agreement in which the tenant agrees to pay rent, common area maintenance expenses, the landlord’s real estate taxes, and the building insurance. In real life, however,

NNN leases vary considerably and allocate responsibilities between landlord and tenant with considerable nuance. Because of legal nuance and its myriad variations, it is crucial that an investor pay close attention to the NNN lease that the tenant has signed and uncover and understand as many “hidden” risks as possible:

LOCATION: Even if a NNN property is located in populous, growing MSA an investor must ponder what might the next buyer pay, 10 years out for a McDonald’s in a “okay” zipcode, with three years left on term? 

EXPENSE CLAUSES:  Investors have to read the lease. Some NNN triple net property leases will require payment of a landlord’s administrative fee on top of reimbursable expenses being – taxes, insurance, operating expenses, utilities, etc.  If overhead (taxes, insurance, maintenance, etc.) is prorated amongst multiple tenants, then it is important to take a close look at the calculation. For e.g. is the proration based upon leasable space or occupied space?     

ABSENTEE MANAGEMENT: Highly passive and absentee investors may assume, mistakenly, that their NNN lease property tenant (value of a NNN) will maintain the property – as specified. That is one possibility: another is that a tenant can gouge the property with minimal maintenance, betting that the cost to litigate versus the cost to repair is in their favor!

BUILD TO SUIT: The more specialized a building is, the greater the amount the next tenant will expect the landlord to contribute in upfront tenant improvements.   Re-leasing can be challenging for an absentee investor who lives far away and/or does not have the capital necessary to remotely fill the property.

VACANCY, RELEASING, & NON RENEWAL:  What does an investor do with a vacant, former Walgreens or Taco Bell? Oftentimes, re-leasing is easier said than done. There’s a reason that a tenant is leaving, and it may have something to do with the location. Let us say that, on the flip side, the location is solid but the tenant fails, or decides not to renew. All these are risks that can be anticipated and must be considered within reason.

INSUFFICIENT GUARANTEE:  A tenant’s brand doesn’t specify to what extent it or a guarantor is obligated to pay the rent. Just because the tenant is Burger King, Verizon Wireless or Chic Fil A, doesn’t mean those companies are 100% behind the tenant. Even if the NNN property investment is company owned and not a franchise, the lessee could be a subsidiary, and the parent company may or may not be guaranteeing the rent payments.  

BANKRUPTCY: A tenant must have the financial strength to perform on rent payments. A track record in trade or business and future prospects of the tenant are both highly relevant.   But, a tenant can appear to be strong: if the tenant is a LLC or corporation with zero assets, it shields the tenant from honoring the lease. If a tenant goes bankrupt, the landlord is responsible for any damage done to the property as well as the tax burden. If a tenant neglects maintenance to cut costs, landlords can find themselves with an asset in deteriorated condition. 

INTEREST RATES:  The value of a NNN investment property lease is correlated to changes in interest rates. The relatively predictable income stream of NNN properties makes them similar in safety, to bonds. Just like bonds, when interest rates go down, the value of NNN lease property goes up.   

Avoid the hidden risks of NNN triple net property leases by calling on your trusted, expert advisors at the Triple Net Investment Group.