About Net Leased Investments

Owners and investors of more management intensive commercial properties such as apartments, office buildings, multi-tenant industrial and shopping centers may at some point opt for more passive investment opportunities. One of the most popular and successful alternative investment strategies has been to acquire single tenant Net Leased Investment properties, in most cases via tax deferred exchanges.

Net Leased Investment properties are typically occupied by a single credit worthy tenant on long term lease where the tenant is responsible for all operating expenses related to the operation of the property. This combination of stable cash flow, long term security, minimal risk and little or no management responsibilities appeals, for obvious reasons, to a broad range of investors. Companies such as Walgreens, WalMart, CVS, Home Depot, Jack in the Box, Wells Fargo, FedEx, and Washington Mutual are examples of tenants who secure net leased properties.

In general, a Net Leased Investment is a commercial property in which the tenant responsible for the expenses related to the operation of the property. These typically include taxes, insurance, common area maintenance, utilities and to varying degrees the maintenance and repairs of the building. Therefore, the annual base rent paid by the tenant is the purest case equal to the actual net return for the property owner. There are many variations of the types of leases and it is important to review each individual lease to fully understand the Tenant and Landlord obligations and the method and extent of operating expenses reimbursement.

The following examples outline the basic types of leases typically used in Net Leased Investments.

Double Net (NN) Lease

This term, while widely used in the industry, often misleads investors. In a Double Net (NN) lease, the tenant is responsible for the payment of taxes, insurance and common area maintenance. However, under this lease structure, the landlord is responsible for the building structure, roof and parking lot repairs. Therefore, it is important for an investor to underwrite for this potential future expense by establishing a capital reserve earmarked for these types of expenditures not reimbursed by the tenant.

Triple Net Lease (NNN)

In a Triple Net (NNN) lease, the tenant is responsible for taxes, insurance, common area maintenance, management, and roof/structure/common area repairs. However, under these leases, the method of expense reimbursement may vary. In many NNN leases with national tenants (Walgreens for example), the tenant directly manages and handles all repairs for the property, and the landlord essentially just collects the rent. However, in other NNN leases (for example leases utilizing the standard AIR NNN form more typically used for single tenant industrial properties), the landlord is directly responsible for the payment of some of the operating expenses related to the property and then bills the tenant for reimbursement for those expenses.

Bond Net (Absolute) Net Leases

Under an Absolute Net lease, the tenant is 100% responsible for all expenses and the management of the property. In addition, in the event of a major damage to or destruction of to the building, the tenant must continue to pay rent and restore the premises to its original condition.

Why are Net Lease Properties so Popular as a 1031 Exchange Replacement Property

• You can sell your existing property, and trade your equity into leased property deferring capital gains
• Little or no property management
• Income guaranteed by an investment grade corporation
• Property is usually well located with good demographics
• Long term leases with rental increases
• Typically straightforward due diligence process
• Long-term, non-recourse financing is available from lending services on a variety of terms and conditions
• Equity can be refinanced out on a tax-free basis after the exchange is complete

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