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The Pros and Cons of Triple Net Properties

In some ways, triple net properties are as much fixed-income investments as they are real estate vehicles.

Offering little to no management responsibility and long-term fixed incomes with the potential for gradual increases, they act like bonds.

However, underlying their financial structures, NNN properties are still real estate and carry the same eventual risks and challenges.

Here are some of the pros and cons of triple net lease properties:

Pro: Stable Income

Con: Limited Upside

Triple net leases are usually structured with a flat rent or with fixed increases. When you buy a $2,000,000 property at a 7.5 percent cap, you know that you can count on $150,000 per year for the life of the lease. Many triple-net properties also have rent increases of 1 to 2 percent per year built-in. They provide some growth, but don't necessarily keep up with inflation. However, this is no different from buying a corporate, Treasury or municipal bond with a fixed rate of return.

Pro: Long-Term 100% Occupancy

Con: Risk of 100% Vacancy

Most triple net properties come on the market with a lease of at least 10 years, with some having initial terms as long as 25 years. This gives you a long time during which you don't have to worry about partial or full vacancy. The drawback is that when the lease does expire, it's an all-or-nothing proposition. The same occurs in the event of a tenant default, although careful due diligence before purchase can reduce the risk of this occurring.

Pro: Attractive Cap Rates

Con: High Price Relative to Underlying Value

Single tenant properties typically trade at attractive cap rates that are hundreds of basis points above comparable non-real estate investments. They're also frequently priced lower than more traditional investment real estate alternatives on a cap rate basis. A large portion of their value comes from their income stream, though, meaning that they could lose value when vacant or as their remaining lease term decreases.

Pro: No Management

Con: CapEx at Rollover

True triple net properties are structured so that the owner has no responsibilities whatsoever during the lease period, while others transfer some capital expenditures to the owner. In either case, the ownership experience is very different from traditional real estate. However, when the lease rolls over, owners have to get involved in the re-leasing process and in any necessary capital expenditures to prepare for a new tenant.

What do you see as the benefits and risk?

Or Contact Thomas Morgan, CCIM Triple Net NNN Broker at 1-866-539-1777



NNN Properties and Your Future

NNN properties are a popular avenue for commercial real estate investment. These are typically single-tenant retail properties where the tenant is responsible for paying real estate taxes, providing their own property insurance and taking care of all property maintenance. Tenants take care of these expenses in addition to other monthly costs such as rent and utility payments. Part-time investors can find NNN properties to be an appealing real estate investment option. It offers a guaranteed stream of income from a real estate investment while also absolving the investor of carrying out many day-to-day management responsibilities for the property.

home depot NNN

Other advantages NNN properties offer are significant. An investor can lock in a long-term lease with a tenant who sets up shop in NNN properties. They can enjoy tax benefits that come from investing in commercial or residential real estate. Finally, successful NNN properties can act as a gateway for securing additional financing to use on other investments.

There are risks in leasing out triple net properties to the wrong tenant. An investor needs to know how to identify a good tenant versus a bad tenant. Assessing the worthiness of any tenant requires an investor to examine a company's business model and the state of its finances. Signing up a tenant in haste can result in disaster for any investor.

A company's credit rating offers an indicator of risk for default. While no investments outside of a federal bond offer a zero percent default rate, a tenant possessing an investment grade credit rating presents less of a risk for NNN properties.

Leasing NNN properties to a company essentially provides them capital. An investor needs to know if their tenant can guarantee long-term success with that capital. Investors should examine multiple criteria when choosing tenants for their triple net properties. They should examine a company's debt to equity ratio, operating margins, the number of stores it operates, the outlook for that industry and how the company is managed.

Investors in NNN properties should also take into account other factors. A successful investment can hinge on everything from location and building size to economic conditions for a particular industry. Triple net properties work best for a smart investor who buys in the right location and selects a low-risk tenant.

Knowing local market conditions is essential for any serious investor. It is important to pay attention to everything from the employment rate to median income in a community before selecting a property. A bad investment can leave an investor with an empty building that is essentially a money pit.

In the end, NNN properties are a great passive income investment that produce low risk yields of 7% or more with little investor oversight and involvement. Contact Thomas to find out more about NNN properties or to buy/sell a NNN property: 1-866-539-1777 or e-mail.

How to Select the Best Triple Net Broker

Given that a net-leased investment typically costs millions of dollars, finding a good triple net broker is particularly important. Working with a good triple net broker will give you better access to inventory, better financing, and a better investment result.

Here are a few things to look for in your quest for a top-line triple net broker.

Fundamental Knowledge

Many of the triple net broker firms in the market lack a solid understanding of the fundamentals of an NNN investment. Look for a triple net broker who knows the difference between a double net, a triple net, and a "true" triple net lease. Your triple net broker should also understand the credit rating system, as this will help them, and you, measure the risk of a given tenant.

Access to Inventory

A strong NNN broker will have a large and diverse inventory consisting of a mixture of their own listings as well as properties offered by other triple net broker companies and off-market deals. This will let you choose from a number of different properties to find the right mix of lease terms, lease length, and tenant quality.

Access to Financing

A good triple net broker knows that the lender can make or break the deal. As such, you should look for a triple net broker who either has an in-house commercial mortgage broker or a strong relationship with an outside broker. Your triple net broker should also understand the many different financing options available, including bank financing, life insurance financing, conduit debt and the "CTL" credit tenant lease programs that provide long-term fixed rate debt for NNN assets.

Client-Focused Business

Your triple net broker should take some time to get to know you and your goals. They should then show you appropriate property. If, for instance, you express a desire to have long-term stable income and your triple net broker shows you properties with five or fewer years remaining on the lease, you may want to select someone else. Watch for a NNN broker who does not attempt to saddle you with more debt than you want. Although some debt carries a number of benefits, it also carries risk, and a good triple net broker will help you strike the right balance.

Experience

Your triple net broker should have a few deals under his or her belt. Although some of the most active triple net broker teams in the company focus on seller representation, there are a large number of good buyer representatives who have amassed a large resume of experience. Work with a triple net broker like that, and if they have a well-respected designation, like CCIM, that is an additional plus.

What is Triple Net NNN? - Triple net lease definition

What is Triple Net NNN? - Triple net lease definition

What is a Triple Net Lease? Here is a quick look at how NNN leases are defined.

How To Find The Best 1031 NNN Properties For Sale

How To Find The Best 1031 NNN Properties For Sale

Find out how to get the best 1031 NNN Properties on the national market delivered to you at no cost!

1031 - To Do or Not to Do? - That is the question

This one was a lot of fun.  I like to dork out on the numbers.

I get asked all the time: "Should I do a 1031 exchange?"

Again the answer: Depends.

Depends on what you bought the property for and what you are selling for and how long you have owned it.  Depends on your overall financial situation and what your needs and investment goals are.

Typically, if you have not owned a property that long, say 2-4 years, it makes sense to pay the tax and reset you cost/tax basis.  That is unless your gain is huge, then you probably want to do a 1031. 

OR if you have owned a property a long time or inherited it and the basis is very low or zero then you should do a 1031.  This is situation that 90% of my clients fall into.

Below are some quick and dirty numbers from the episode "NNN 1031 Secret #2" of the 1031 Exchange Passive Income and Investment Series on iTunes and every other podcast platform and YouTube.  The audio has more info and details than this post and I dive into this topic in depth so make sure to download it for your next drive, walk or exercise or for when you are doing the dishes.

A lot of times people who are new to a 1031 exchange get cold feet, have misgivings or get overwhelmed with the process and say "I'm just going to pay the tax."

I say "It's your money. You should definitely do what you want and need to. But consider this...."

Basically, in my humble opinion, the 1031 exchange is the greatest wealth building tool known to mankind besides compound interest

For the purposes of this example I am going to use $1,000,000 as the total sale proceeds. If you have $5MM or $10MM sale proceeds, the cash flow and capital accumulation are of course magnified 5X or 10X.

Listen to the show for details but most people considering a 1031 have zero or very low tax basis in the property they are selling. The majority of my clients have pretty much the entire sale price as the capital gain. On a $1MM sale, with zero basis the capital gain is $1MM.  I have one client right now with a $15MM gain and have worked on one with a $40MM gain. How does paying $10MM to $12MM in tax sound?  Ouch!

Fed capital gains tax is 23.8% right now with the ACA tax included and most states also have a capital gains tax.  The IRS will also tax you on the depreciation you took over the life of the investment which is called a recapture tax and that is 25%.  In effect, the capital gains tax is much higher than the stated rate dependent on how much income you sheltered with depreciation over the life of the investment.  A good rule of thumb is 30% of the gain goes to Uncle Sam.

In the examples below, if you have a $1MM gain/sale, $300k goes to taxes and you have $700k left over.  Yes a 30% reduction in investment capital. 

BUT I look at inversely, if you do a 1031, the government allows you to keep and use (for the time being through deferral) the $300k.  This is about 43% more investment capital (30% tax of $1M is 300k but 300k more than 700k is 43% MORE.)

This is the kicker.  If you can invest $700k or invest $1MM and you get the benefits of the investment such as cashflow, depreciation and appreciation, which would you choose?

Most of us would rather get the benefit of the $300k now and in the future rather than cut a check to the IRS now.  Once you write the check, $300k of your money is gone.  POOF!

This is what the numbers look like.  I ran them two ways. One based on a triple net investment for cash flow.  And two for an IRR deal like development or value add or sell in the future type deal.

Effects of 1031 on Cashflow

For a NNN investment, let's say you get 6.5% cap rate or annual cash flow.  This is all unleveraged of course. 

1031 NNN CF.png

At end of the day you have 43% more money invested and therefor 43% more benefit. 

Pay tax now of $300k or get $20k more per year in cash flow on the $300k. Over 5 years this is $100k more.  Over 10 years this is $200k more.

Would you rather have $65,000 per year or $45,500 per year?

Or another way to see it:

Lose $300k now (send a check to IRS) and lose $20,000 per year of additional income for the rest of your life!

Effects of 1031 on Capital Growth

The other way I looked at was from an IRR perspective or overall rate of return. (IRR is Internal Rate of Return or annual overall yield)  Let's say you have an opportunity to invest in a NNN development or apartment building with upside or a value-add investment deal.  The IRR takes into account all cashflows including purchase and sale and costs etc.

15% is a reasonable IRR. You can get that on strip centers and apartment buildings and rehab projects.  Most developers are targeting 20-30% IRR's so 15% is reasonable.

1031 IRR Effect.png

Hmmmmm.... 1031 or no?

Over 5 years grow your $1MM to over $2M?  Or pay the tax and leave $603k on the table?

Over 10 years grow your $1MM to over $4MM? Or pay the tax and leave $1,213,667 on the table?

Easy decision for most of us.

Pay the Tax and Invest Outside of the 1031?

Earlier this year a client was wavering and going back and forth on a 1031 exchange.  They had $3.6MM from the exchange.  They thought they could pay the tax in order to get higher yields outside the 1031. 

Sure there are more investments outside of the 1031 like stocks and private equity etc.. However, when compared to NNN 1031 Investments those investments are going to be much more risky. This client's goal was secure, passive income and capital preservation. Paying the tax and trying to invest in these other types of investments were totally contrary to these goals.

Let's say they could get 6.5% cap rate/yield on the NNN 1031. That is $234k per year of income.

They were looking at over $1M of taxes. Poof!

At the end of the day, after paying tax and reinvesting they would have to get a 9.3% cap rate or IRR to get what they would get on the 1031 NNN property.

Not sure about you, but I don't know of too many investments, if any, paying 10% per year that are hands off, safe and protect your capital. Maybe Madoff can help?

Here are the numbers:

yield outside of NNN 1031.png

Another option here which many of my clients have is to do the 1031 all cash then refi.  The IRS does not tax the refi proceeds.  In this case the client could have easily gotten a 50% loan and pulled out $1.8MM.  Then the tenant pays back the $1.8MM loan and the $1.8M in proceeds could be invested in something at a higher yield. 

To me, this is the ultimate benefit. On the $1MM example, a person completes a $1MM 1031 at 6.5% then pulls out $600k (60%) tax free and reinvests in whatever they want.  This is 900k of money that will accrue to your benefit.  ($300k tax deferral and $600k loan reinvested).

Now, that is wealth building! 

What do you think Warren? (Buffet of course)

Let me know your thoughts and if you think a 1031 exchange is right for you!

Text me at 970-618-4086 or get a free 1031 exchange and real estate investment consultation here.

Cheers, Thomas

Is the Lease really NNN? - 1031 Exchange & Passive Income Investment Series

Today we look at if the Lease is really triple net?  Is it absolute net, triple net or double net?

Get the Whole Podcast on Itunes here.

In NNN investing, the lease is one of the most important things. The point of investing in NNN properties is to have a hands off investment.

When buying NNN properties make sure to read the lease to see if it is really true NNN or not.

Many triple net brokers and NNN sellers will advertise the lease as "net leased" or "ease of management" or "minimal landlord responsibilities" . Often times the lease will have more landlord responsibilities that advertised. Thomas Morgan, CCIM of 1031navigator.com talks about absolute net leases, NNN leases, and NN leases.

Beware of opening escrow without having read the lease to see if it is triple net or not. This will save you time and money on your 1031 exchange NNN property purchase.

 

 

Is the Lease really a NNN Lease? - Triple Net Properties Q&A

Today we look at if the Lease is really triple net?  Is it absolute net, triple net or double net?

In NNN investing, the lease is one of the most important things. The point of investing in NNN properties is to have a "hands off" investment.

When buying NNN properties make sure to read the lease to see if it is really true NNN or not.

Many triple net brokers and NNN sellers will advertise the lease as "net leased" or "ease of management" or "minimal landlord responsibilities" . Often times the lease will have more landlord responsibilities that advertised.

In this Video and Audio Q&A Thomas Morgan, CCIM of 1031navigator.com talks about absolute net leases, NNN leases, and NN leases.

Beware of opening escrow without having read the lease to see if it is triple net or not. This will save you time and money on your 1031 exchange NNN property purchase.

Video

Audio Version

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1031 Navigator helps investors nationwide find the best 1031 Exchange replacement properties in the shortest amount of time.

Our focused expertise, experience and daily triple net market presence enables clients to complete their 1031 Exchanges with peace of mind and certainty. 1031 Navigator has been involved with over half a billion dollars of 1031 Exchange NNN Properties in over 30 states.

1031 Navigator is a service of Andrus & Morgan Co., a national commercial and investment real estate brokerage specializing in passive income investments.

For a free, no-obligation 1031 Exchange NNN Property Strategy session for your 1031 Exchange visit:

http://www.1031navigator.com

5 things to look out for when buying a Dollar General 1031 Exchange

5 things to look out for when buying a Dollar General 1031 Exchange

Watch out for these 5 things when buying a DG for 1031 exchange.

5 Tips for Your Next Ground Lease Investment

5 Tips for Your Next Ground Lease Investment

How to find and buy the best NNN ground lease investment.

Deal Roulette - NNN Dunkin Donut in PHX

What nearby deal is a good NNN real estate investment?

TMO plays a game of deal roulette and looks at a net leased NNN Dunkin Donuts property for sale with 9 years on a absolute triple net lease.

It is a nice NNN building in downtown Phoenix, an attractive piece of real estate. It features a great location on 16th St and Bethany Home Road NNN Dunkin Donut For Sale which is quite a busy intersection with high traffic volume and a number of other properties nearby.

However, it has pretty aggressive cap rate and high per square foot rate, but it looks like it could be a good deal.

The price is $2,375,000

Deal Roulette rating is A- to B+.

99 Pitfalls and Mistakes of 1031 Exchanges

Make sure you don't mess up your 1031 exchange.

Learn about the common 1031 mistakes and errors people have made.

Get the Report

About the NNN Dunkin Donut For Sale Tenant:

Dunkin’ Brands Group, Inc., together with its subsidiaries, owns, operates, and franchises quick service restaurants under NNN Dunkin’ Donuts worldwide. The company operates in four segments: NNN Dunkin’ Donuts U.S., NNN Dunkin’ Donuts International, Baskin-Robbins International, and Baskin-Robbins U.S. Its restaurants offer hot and cold coffee, donuts, bagels, muffins and sandwiches, hard-serve ice cream, frozen beverages, baked goods, and other products. As of February 10, 2014, the company had approximately 11,000 Dunkin’ Donuts restaurants and 7,300 Baskin-Robbins restaurants, which are primarily owned and operated by approximately 2,000 franchisees, licensees, and joint venture partners. Dunkin’ Brands Group, Inc is publicly traded on the NASDAQ (DNKN) with a market capitalization in excess of $4.5 billion.

NNN Dunkin Donuts For Sale

Deal Analysis: 1031 NNN Investment

Deal Analysis: 1031 NNN Investment

Advanced market and location analysis we provide our clients.

Current 1031 NNN Buy Need for VIP Client

dennys.jpg

Just in.... 1031 NNN Property Want/Need.... This VIP client is the son-in-law of a long time Exclusive client. We have sold his father-in-law almost $30M worth of NNN properties in several states over the years. (Find out about the VIP and Exclusive Buyer programs here)

“Hey Thomas, I have 600k to 800k laying around that I need to get out of the bank and into an income property. Can finance if needed up to, let’s say, $1.5M. It is a partial 1031 exchange so would like to do something sooner than later. I like what you found my father-in-law for his 1031 exchanges and other investments. The triple net properties really appeal to me. Would like to get as high as cap rate as possible, can go anywhere in US. OK with some risk as I am still young and not afraid to get after it if needed. However, would not mind sitting back and just collecting a monthly check! Thanks, AG”

Today’s Deal Rundown

Possibilities

MAYBE - Denny’s in Ohio, $1.76M 6.25% cap rate. Pros: Advertised as absolute net with 13 years on term and strong store sales. Good demographics. Larger, almost 1 acre lot. Strong traffic counts of 31k. Cons: old building - 1970 Status: confirming who guarantees lease and last remodel and to what extent.

MAYBE - 7 year leaseback Boise NNN office $1.16M Pros: curb appeal, 7 year dress lease, 7% cap ask price, $200 psf, downtown location, high population growth, decent size western MSA, nice bite size deal Cons: small .28 acre lot, tenant strength Status: checking on who tenant is, needs more in depth location and market rent analysis

OF INTEREST - 15 year Grease Monkey in IL Pros: new 15 year absolute net lease, low price point of $620k, under $200 psf, corporate lease, 10% bumps, new branding and remodel. Cons: maybe franchisor/franchisee issues, single use building, lot size unknown (for now), unable to assess exact location

Passed On

PASS - 20 year NNN Salad N Go PHX $1.28M @ 6.8% cap Pros: nice long term absolute net lease. Good location. 2% annual bumps after year three. Cons: small building size of 677 sf puts sale price psf at $1,890! Also puts rent at $128 psf annually! Yikes! Also only has operator guarantees.

PASS - Verizon NC - 9 years left on 11 year lease $1.74M 6.25% cap rate Pros: 9 years left with 600 unit operator. Advertised as NNN lease. New construction 2013. Good highway frontage near Wal-mart. Close to the Western Carolina University, having more than 10,000 students. Cons: high psf of $500. Negative population growth for area. Boonies of NC. Town of only 2,500 people (more in outskirts but still small). Away from main population base and highways especially for a 6.25% cap rate. Flat lease with only 5% bumps in options. $31 psf net rent which would be hard to replace.

PASS - Chase Bank Ohio $600k Pros: long time operation at this location, 26 years, under $200 psf, ok cap for national bank at 6.75%, low $13 psf rent, Chase remodeled in 2015 Cons: 1988 construction, some landlord responsibility, only 4 years left on lease, negative population growth

Off to a good start!  However, amazing how many NNN deals look great on the surface only to find out they have major flaws.

NET LEASED PROPERTIES for sale

NET LEASED PROPERTIES for sale

This weeks round up of good NNN 1031 properties ready for investment.

Not All Walgreens NNN Investments Are Created Equal

Not All Walgreens NNN Investments Are Created Equal

What to look for on differing Walgreens investments.

Current NNN Cap Rates

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Here is a great chart of current asking cap rates for single tenant NNN deals. It is sorted by NNN tenant and NNN year built. Originally published in Western Real Estate Business May 2013. Data by Boulder Group.

"Ignore the Recession" - More reasons to buy a Net Leased TSC

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TSC is one of my favorite NNN tenants. Nice buildings, great locations, solid financials, long leases, low management for owners; the list goes on and on. ABC News Nightline did a segment this week of why TSC is a "Recession Proof Retailer". TSC's internal strategy has been to "ignore the recession". It appears to have worked.

Net Lease Properties a Hot Commodity Due to Low Yields on Alternative Investments

Net Lease Properties a Hot Commodity Due to Low Yields on Alternative Investments

Today a 10-year government bond would yield a return of approximately 1.5 percent, while a net lease building offers returns from 5 percent to 8.5 percent or greater. There is also little risk associated with class-A net lease properties—as long as the location is good and the building is well-maintained there will always be tenants willing to sign leases even if the existing occupant leaves. This inspires greater confidence in conservative investors than the recently volatile stock market.