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As compared with TIC's, triple net properties (sometimes referred to as NNN's or Net Leased Properties) are whole ownership properties which can be used as replacement properties in 1031 Exchanges. Usually such properties are sale and lease
back properties where, because of various financial considerations, the company
that built or had the building built (and wants to use it in its business) does
not want to tie up capital and would rather lease than own. So, they make such buildings available to
investors (including 1031 Exchangers) who can invest their capital (and usually
have mortgage financing), receive rent checks in the mail each month while the tenant
takes care of maintenance, taxes and insurance on the building, thus the name triple
net.
Drug
store chains, fast food restaurant chains and other business types have
traditionally used the sale and lease back pattern and, as a result, people
have been able to invest in such things as Walgreens, Applebees, etc. People consider such properties to be relatively safe investments because of the "credit tenant" who is obligated to pay the rent, usually on a long term basis that can go out thirty years, but the lease term varies among offerings. For
1031 exchangers, the investment is done with pre-tax dollars, the return is
attractive to many and the income steam is long.
The negatives of Triple Nets, at least in some people's minds, include the possibility that even credit tenants (remember K-Mart) sometimes go bankrupt, it is hard to get any diversification unless you have millions to invest, the holding period is in fact too long, the rents are often relatively flat, refinancing may be required some day, resale may not be easy or profitable especially as the long term lease becomes shorter (and if the building is considered a special use building), and even triple nets may require some degree of management. Also, what does the investor or his family do
with the property when the lease is over and the tenant may not be willing to
renew? Most whole ownership triple nets require millions of dollars to buy so are outside the reach of smaller 1031's.
This is not to say that triple nets are not the right choice for some 1031 Exchangers (and even other real estate investors). For example, if a 1031 Exchanger's relinquished property was highly leveraged, a triple net might be a good candidate for replacement property because sometimes financing can be arranged on triple nets up to 85% LTV.
On the other hand, TIC's generally carry prepackaged mortgage financing of around 60% LTV (some may be lower and some may be a little higher). Also, triple nets may allow the exchanger to
match both debt and equity requirements to complete the 1031 Exchange, but may
also permit refinancing so the exchanger may take out cash tax free for other
uses. TIC's generally cannot be refinanced to take out cash. Also, it may be possible to resell a triple net, but generally TIC's must be held by the investor until the sponsor resells the property, often in five to ten years. Sometimes, for exchanges over $5 million, it is possible to create a portfolio of TIC's and one or more triple nets to get the best of both worlds.
In essence, a triple net is much like buying a long
term corporate bond. The credit tenant
promises to pay a competitive rate of return usually for many years, but at a
flat rate, with a potential bonus or kicker at the end when the lease expires
and the investor is left with the real estate to recycle.
1031Replace.Com, which is a licensed real estate broker, is able to
assist those who choose triple net properties as 1031 Exchange replacement
properties (or as non-1031 investments). The triple net property seller may pay a commission to 1031Replace.Com
if a customer of 1031Replace.Com purchases a triple net property.
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