For those interested in investing in commercial real estate without having to get their hands dirty with the day-to-day management of a property, purchasing a Triple Net Property is ideal. A Triple Net Property is a parcel where the tenant or tenants are responsible for paying all of the operating expenses, including common area maintenance, taxes, insurance and utilities. In this scenario, the property owner does very little other than cash rent checks. However, buyers need to be careful to ensure that a property advertised as Triple Net is truly that, and the following considerations are a good place to start:
Quality of Tenant and Lease: A Triple Net Property is only as good as the lease that comes with it, and that lease is only as good as its tenant. Buyers must make sure that tenants are creditworthy; otherwise, without a paying tenant, not only would the buyer be out of rent payments, but they would also be responsible for taxes, insurance and property upkeep. In addition, buyers should read leases carefully to confirm that the remaining term is long enough to allow them to recover their investment, and that there are no tenant early termination options hidden in the fine print. Finally, buyers should confirm that there are no tenant Rights of First Refusal, which might prevent the sale of a property.
Watertight Triple Net Lease Language: Although a property may be marketed as Triple Net, the actual language of the lease may not bear that out. Buyers must thoroughly abstract all leases as a part of their due diligence to ensure that there is no potential for financial leakage, which can occur in a variety of ways. For example, a cap on annual increases in CAM charges may end up costing a buyer money in the long run, or a lease may state that a landlord is responsible for capital costs or replacements, which can add up quickly.
1031 Considerations: Often, Triple Net Property deals are completed using a 1031 exchange, which allows a property owner to postpone paying tax on a gain from the sale of real property if the proceeds of the sale are reinvested in a similar property as part of a qualifying like-kind exchange. However, there are very strict deadlines that a property owner must meet in order to qualify for this tax benefit, including identifying the property to be purchased within forty-five (45) days of a sale, and closing the purchase within one-hundred eighty (180) days.
The attorneys at Bouvier Law stand ready to assist you on your next Triple Net Property purchase, or with any of your other real estate needs.
JOSEPH P. HEINS