1031 NNN Properties Mean No Landlord Responsibility

Feb 2, 2017

Many property owners or brokers will promote this term for their listings but a large percentage will not actually be correct.

Why? For the simple reason that NNN properties have roof and structure stated as the responsibility of the landlord in the lease.

The owners think for their own personal reasons that if they pass on the real estate taxes, insurance and common area maintenance that is the meaning for NNN properties, not the roof and structure, so they call them Triple Net or NNN properties or Net Net Net deals regardless.

When purchasing a 1031 NNN Property make sure the lease clearly states that the roof and structure, walls and floors are the responsibility of the tenant.

If not, the investor will have to deduct a certain percentage of the cost based on a timeline that a roof and other structural items last, in order to save up the cost of their replacements in the future.

For example, a roof that may last 20 years before replacing and its cost could be $4.00 a sq. ft. on a 10,000 sq. ft. building equates to about $40,000 over 20 years or $2,000 a year that comes from the Net income which lowers the purchase price on whatever CAP rate is used to determine the price.

Check on parking lot replacement and HVAC as well along with tuck-pointing or flooring. These combined capital expenses could lower the net income as much as 50 cents per sq. ft. and be considered a Double Net Lease, not a true Triple Net one.

The typical terms that Triple Nets should illustrate are pretty transparent and understood in the lease. The landlord gets a check from the tenant in the mailbox and no phone calls about repairs or replacements unless they are calling to make the owner aware of the problems and who they are using to repair or replace the items.

Of course, a disaster like fire or flood should always be conveyed to the owner who may have insurance in place to correct anything disastrous like if these situations occur.

The true structure of Triple Net, NNN properties or Net Net Net properties is very appealing to investors knowing that they have a secure income stream without deductions and they paid a premium CAP rate for that outcome.

Of course, the lease has to be backed or guaranteed by a quality tenant with good financial strength in order to make sure they can pay for these expenses without failing to pay rent.

The tenant’s credit is very important in order to pay a low CAP rate deserving of the lease that has been signed. The length of the lease and its proper lease rate not over inflated for the type of building or the area are just as important in determining the correct value of the property.

Checking with a real estate attorney and making sure he reviews the Triple Net lease you think you are buying is critical. Pay the extra to protect your purchase.

The building, the area, the growth of the city, the rent being paid, any increases in years to come to keep up with inflation, the price per sq. ft. for the building and the land along with a loan offered and how many years the rate is locked in for with a certain down payment all enter into the equation.

What is return on equity and chance for future appreciation and how much depreciation the investment throwing off? Is the building already obsolete or does it have the right features for new technology or a workplace for its employees or customers to enjoy? Proper electric, plumbing, ceiling height, column spacing, internet speed, ingress or egress issues or visibility?

Like everything else in life when making a decision, know what you are truly getting for the price you pay!

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