Owning a commercial income property has numerous benefits, and can allow you to reach your investment goals more quickly than other investment methods.
This is particularly true with net lease properties, which depending on the type, require tenants to pay anywhere from a portion to all of the expenses associated with the property.
If you own several residential properties or have equity in an under-performing commercial property, net lease properties can be an excellent way to diversify your portfolio while adding a steady stream of income.
Below are several questions investors ask about net lease properties.
What Is The Difference Between a Single, Double, And Triple Net Lease Property?
Single Net Lease
A single net lease tenant pays property taxes plus a base rent. The owner pays common area maintenance fees (also known as CAM), property insurance, and all other operating expenses. Property taxes are usually paid through the owner in order to ensure they are paid on time.
Double Net Lease
In a double net lease, also called an NN lease, the tenant pays a base rent along with property taxes and insurance.
If there is more than one tenant, than these fees would be split among all tenants, although not necessarily equally. That’s because some tenants may make a deal that allows them to pay a higher base rent in exchange for a reduced share of the expenses.
Triple Net Lease
Triple net lease properties are the least management intensive of properties. Tenants pay all expenses and fees associated with the property, including capital expenditures.
Is There a Way To Get a Tax Break If a Net Lease Property Is Vacant?
In some states, you can pay less in property taxes if a property is vacant.
In these states, the assumption is that the property is worth less than the market rate, and if the property is experiencing a higher than average vacancy rate, market value goes down.
Since the value of a commercial property rests on the tenant, if there is no tenant, the property is essentially worth nothing. In cases where there is more than one tenant, yet the anchor tenant goes dark, some states also allow you to apply for lower property taxes.
In order to qualify, you’ll need to go to the tax assessor’s office and let the appraiser know about the extended vacancy. If that doesn’t work, you can also try a property tax appeal, which will generally require you have the property appraised again.
What Are Single Tenant Net Lease Properties?
Net lease properties can be single or multi-tenant properties.
Single tenant net lease properties can be single, double, or triple net leases, however if a property is occupied by an investment grade tenant, it will almost always be a triple net.
Traditionally single tenant net lease properties have been long-term leases of up to 25 years, and this is still the case with industrial grade, creditworthy tenants.
However there’s a growing number of single tenant net lease properties in secondary markets who have begun lowering the number of years on the lease, so it’s a good idea to check and make sure the lease is actually a net lease when you consider purchasing the property.
How Much Do Single Tenant Lease Properties Cost?
STNL properties range greatly in price, but there are many properties under $5 million. Unlike residential property types, commercial properties gain their value from the tenant, so financing an STNL is based on the creditworthiness of the tenant, not your personal credit history.
Through leverage, an investor can acquire a moderately-priced STNL such as a dollar store, auto parts store, or quick service restaurant with as little as $200,000 down. Credit Tenant Lease financing is one way this can be done.
What Is Credit Tenant Lease Financing?
CTL financing allows you to purchase a triple net lease property by using the rent paid by the tenant as security.
Financing is structured as nonrecourse debt, which means the property becomes collateral for the loan. If you default, the lender can only seize the property and cannot sue you for further compensation, even if the value of the property does not cover the loan.
Tenants must be creditworthy tenants with a credit rating of BBB or higher from S&P, and are national tenants like AutoZone, McDonald’s, Walgreens, CVS, and 7-11.
If you do decide to do a CTL loan, keep in mind that you will most likely not receive any income from the property, as rents will go straight to the lender.
You’ll also want to make sure there are at least ten or more years left on the lease; otherwise you risk losing the property to default if tenants leave before you finish paying off the loan.
If you’re interested in purchasing a higher-priced property, your best bet would be to look for private lenders interested in a good deal. You could also try finding a value-add deal in a secondary market instead.
Can You Do a 1031 Exchange With a Triple Net Lease Property?
Triple net lease properties can definitely be used as a replacement property in a 1031 exchange. Thus you have several other properties whose value is equal to or less than the cost of a new triple net lease, you can sell them and use the proceeds to purchase the triple net.
Triple net lease properties are liquid investments, so if you decide to sell the property sometime in the future, you can engage in other 1031 and either purchase a different property, or use the capital for another purpose (you will be liable for capital gains taxes in the latter case, however).