NNN Leases

What is a Triple Net Lease?

A triple net lease, a type of commercial leasing agreement, is a lease where the tenant pays the insurance, maintenance, taxes and rent. There are pros and cons associated with a triple net lease for both the tenant and the landlord.

Prior to making a decision, individuals should carry out extensive research about the triple net lease. Often times, a triple net lease is referred to as a true net lease as usually the landlord has no responsibilities related to the upkeep of the building. This is the reason why a majority of commercial landlords prefer triple net leases over any other type of lease. The terms of a triple net lease agreement are individualized to the lessor and the tenant. These may include stipulations and restrictions to protect both the parties involved in the agreement.

Understanding a 1031 Exchange

The IRS Code reads:

“No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like kind, which is to be held either for productive use in a trade or business or for investment.”

What it means:

Section 1031 of the Internal Revenue Code states that upon the sale of a property, the investor can use the funds from the sold property to purchase another similar property and not be liable for any capital gains taxes on proceeds from the initial property.

Understanding Capitalization Rate

Some common approaches to valuing a business as a going concern involve determining a good measure of earning power and capitalizing it. This determines the value of the business to an investor based on the future returns he or she can reasonably expect. A Capitalization Rate, commonly referred to as a Cap Rate, serves as the basic metric to value a Real Estate deal. It is the yearly rate of return expected on an all cash investment in a real estate property.

For example

Challenges of Investing in Real Estate

The commercial real estate market is making a comeback! Recent data suggests that now seems to be the ideal time to add real estate to your investment portfolio. Some benefits of investing in commercial real estate are:

  1. Stable cash flows: Commercial properties are typically occupied by tenants that have long-term leases, making cash flow fairly predictable.
  2. Low risk diversification: Private commercial real estate investments can be a wise portfolio diversifier since their returns have low correlations with other asset classes such as stocks and bonds.
  3. Inflation Hedge: Given its positive correlation with changes in the consumer prices, real estate investment can provide a partial hedge against inflation. As consumer prices rise, so do real estate cash flows and, typically, associated property values.