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Net Leased Properties |
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Net Leased Properties are traditionally
real estate investments without management obligations for the owner. In their purest
form (called a triple net lease or NNN lease) the tenant manages the property, pays
the taxes and insurance, and takes care of all repairs and maintenance. The only
obligation of the owner is to pay any debt service (mortgage payment) resulting
from any debt he placed. |
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Absolute Triple Net
(NNN): |
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The tenant is responsible for all operating expenses including maintenance,
repairs, and replacement for the entire property, without limitation. This is the
type of lease that most investors expect when purchasing a triple net lease. There
are few legal defenses for the NNN tenant not paying their rent and related expenses.
One example of a possible defense for the tenant not to have to fulfill their NNN
lease obligation would be if the property were to become subject to eminent domain
proceedings.
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Double Net Lease (NN): |
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The double net lease typically requires
some level of owner responsibility for the property. Traditionally in a double net
lease the owner is responsible for the structural components of the building such
as the roof, bearing walls and foundation. |
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Triple Net Synthetic
(TIC): |
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Tenant-in-Common (TIC) investments provide
the real estate investor with the advantages of a triple net lease; someone else
manages the property. Frequently TIC investments offer ownership in large institutional
quality properties, with either single or multi-tenants, appreciation, cash flow
and annual depreciation benefits. In addition to the net leased advantages, the
lower initial investment required by TICs provides an opportunity for the investor
to achieve greater diversification with their investment dollars.
While there are a number of factors to consider when looking at net
leased properties, special attention to the three areas below will provide the investor
a good sense of the suitability of a given property. |
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Bond Leases and Modified
Net (Modified Gross): |
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Bond leases are commonly called a "hell
or high water" lease. Under this type of lease the tenant is obligated to continue
paying rent no matter what occurs with the leased property. A Bonded Lease is a
form of an absolute triple net lease where the tenant agrees to pay a monthly lump
sum base rent as well as the property taxes, the property insurance, and the maintenance.
What makes the bonded lease different from the absolute triple net lease is that
there are no legal defenses for the tenant not honoring their obligations under
the terms of the lease.
In the Modified Net or Modified Gross lease,
the tenant pays their own utilities, interior maintenance, repairs, and insurance.
The owner pays for everything else, including real estate property taxes. |
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Lease Terms: |
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Lease terms should be carefully considered.
Look at: length of lease, options, kinds and frequency of bumps or increases, termination
clauses and any expenses that the investor/property owner could ultimately be liable
for.
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Tenant Credit: |
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"Credit" tenants have investment-grade credit
rating from a nationally recognized rating service and are considered the most desirable.
Credit tenants will provide greater security and typically lower returns than non
credit tenants. Investors looking for higher returns frequently invest in properties
with regional and local tenants. These tenants need to be carefully investigated
to make sure that the investor fully understands the added risk and whether or not
they are being compensated for taking that risk. There are a number of sources for
information regarding public companies including www.zacks.com and www.freeedgar.com.
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