Wednesday, October 6, 2010

What is a Triple Net Lease?

Triple-net leased properties are an increasingly common replacement property for 1031 real estate exchanges, since the owner of the triple net property has no management duties.

A triple net lease is a lease agreement on a property where the tenant agrees to pay all real estate taxes, building insurance, and maintenance and utilities (the three 'Nets') on the property in addition to base rent and any normal fees that are expected under the agreement.

The advantage of owning a building with a triple net lease is that it can generate a high level of income for the owner with no management duties. When used in commercial properties, the tenant is usually a single tenant, investment grade rated corporate business with a long-term lease and a stable cash flow.

The tenant has many of the advantages of ownership, including control over the property, without the substantial capital investment that a new acquisition requires. Since the tenant will want to attract customers, the property will be kept in good condition, and regular improvements will be made as well.

Risks include questions pertaining to the health of the tenant's business model and factors concerning their financial strength such as the number of stores, debt to equity ratios, operating margins, stability of management, and the outlook for their industry sector. For example, drug stores are considered a growth industry due to the aging demographics of the population, while video rental stores are vulnerable to new technologies like the Internet.

The main mitigating factor to these risks is that the buildings are almost always in attractive locations for a new tenant should that need arise.

If you are looking for:

  • a real estate investment with buildings that are typically new or nearly new
  • no management responsibilities
  • a long-term lease to a quality tenant
  • high rate of return
  • stable cash flow
  • attractive financing
  • the unique tax benefits only real estate provides

Then a triple net lease property can be a great option.


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