The landlord is relieved of the responsibility to pay all expenditures indicated above, including property taxes, insurance premiums, utilities, maintenance, and repair charges, under a triple net lease, often known as a net-net-net or NNN lease.
Rent and all expenses shall be the responsibility of the Tenant. Triple net leases are often long-term (ten years or more), and they frequently have provisions for rising rent.
It is quite common to purchase triple net leased commercial real estate properties out of state for investment purposes. The reasons for investors to purchase properties out of State is due to availability and possibly higher returns.
The motivation for purchasing triple net leased properties is for several reasons:
Triple net lease investment portfolios typically include three or more premium commercial buildings that are leased by tenants with steady cash flow. These high-end properties can be office buildings, industrial parks, shopping centers, or standalone structures that rent space to institutions like banks, pharmacies, national restaurant chains, and so forth. Typically, lease lengths range from 10 to 15 years and take into account the gradual increase in the contractual rent.
With such a portfolio, investors can benefit from a steady, long-term passive income and possibly see the capital appreciation on the properties that are being leased out, which means they can be sold for substantially more than they were purchased for. Long-term tenants help ease management issues such as vacancy filling, tenant improvement expenses, and leasing charges.
- Investors searching to place funds from their 1031 exchange and defer income taxes.
- Typically, there is no management requirement since the tenant is responsible for the maintenance and payment of expenses.
- The search is for high-quality tenants and long-term leases.
- It may increase safety for the investor due to the quality of the real estate.
- Depreciation of the improvements increases net cash flow.
- Appreciation of real estate v. purchase of a bond
Warnings signs for out of State acquisitions:
- Out of sight and out of mind. You may not be aware of poor maintenance by the tenant if you’re not inspecting the property frequently.
- Changes in the area might affect the desirability of the property.
- The tenant might have a business downturn that requires layoffs that you may not see being an absentee owner.
- Inspections of the property, prior to the purchase, by the investor or the broker may provide you with valuable information regarding the safety of the building and its history.
- Visits to the Building and Safety departments in the local area may uncover hidden areas of concern, for instance, fire or floods.
- The intrinsic value of the triple net property may be less than the true market value of the real estate.
Investments usually carry some level of risk, and triple net lease properties are no exception. Just like an individual leaseholder, businesses might experience financial difficulties and break their lease.
Again, this is why it’s always a smart option to have them consider making net payments and then you can pay the bills yourself to ensure timeliness and payment in full. Even if they don’t fully default, they might not be able to hold up their end of the bargain entirely and may neglect to take care of the property or fail to make required payments.
The desire for real estate investors to purchase triple net leased properties may come with issues and the investor must perform its due diligence. Clearly, the purchase of these assets is not without risk!
At Segal Commercial, we place a high premium on safeguarding the financial portfolios of our clients and providing wise counsel and investment plans. Along with other high-income rental properties, we specialize in triple net lease investment properties and 1031 exchanges.
Lee Segal has more than 40 years of experience working in this specialized field, and we strive to offer each and every one of our clients a first-rate investing experience while also guaranteeing that they get the most out of each rental property. Contact Lee today to learn more.