Understanding Net Leased Investment Properties
Net leased investment properties are typically occupied by a single tenant on a long-term lease (usually 10-20 year initial lease terms with options). The investor owns the land and building that is occupied by the tenant and the tenant is responsible for the maintenance, taxes and insurance expenses related to the property. The most desirable net leased investments are those that are occupied by national credit companies. The lease structure, for these types of investments, typically offers rental increases on a consistent basis and lease renewal options for the tenant. The combination of stable and consistent cash flow, long-term security, minimal risk and little or no management responsibilities is very attractive to commercial real estate investors. Companies such as Jack In The Box, Inc., Walgreens, CVS, Burger King, KFC/Taco Bell, Carl’s Jr., Wendy’s/Arby’s, Washington Mutual, Blockbuster Video, Starbucks and Autozone are examples of companies that sell their assets under a net leased investment scenario.
Double Net (NN) Lease
Double net leased investments are the least attractive type of net leased investment property. Under the double net lease, the tenant is responsible for the payment of property taxes, insurance and common area maintenance. However, the Landlord is responsible for the maintenance of the building structure, roof and parking lot. The Landlord responsibilities under the double net scenario can be extensive and have a negative effect on overall investment return. Therefore, it is important for an investor to include future expenses in their investment analysis assumptions and also plan on establishing a “reserve account” for future capital expenses.
Absolute Triple Net (NNN) Lease
Absolute triple net leased investments are the most attractive type of net leased investment property. Under the absolute triple net lease, the tenant is 100% responsible for the payment of the operating expenses for the property including property taxes, insurance, common area maintenance, property management, and building maintenance and repair. The Landlord merely collects the rent and has no management, tax or maintenance responsibilities.
Why should an investor include investment properties in their real estate portfolio?
- – Single tenant, triple net leased investment properties help the investor achieve a balanced investment portfolio
- – These properties offer a secure investment alternative via long term leases with national credit companies
- – These properties provide guaranteed monthly income with fixed rental increases throughout the life of the lease term
- – You can leverage the purchase of these investments and reduce your taxable income by deducting interest expense and depreciation
- – Absolute triple net leased investments are management free
- – The tenant pays for the annual property taxes, maintenance and insurance on the asset
- – These properties are usually well located in areas with good demographics
- – Lenders are attracted to these types of investments which makes financing much easier than other types of investment properties
- – These types of properties help an investor balance their real estate investment portfolio