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TRIPLE NET LEASE (NNN) INVESTING

Educational guide to triple net lease investing and its appeal to 1031 exchange buyers

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Triple net lease investing, generally referred to as NNN investing, is one of the more commonly pursued strategies among 1031 exchange buyers looking for a relatively passive, single tenant property. This is a general educational overview. It is not investment advice, and any specific acquisition should be evaluated with a financial advisor.

What Makes a Lease Triple Net

In a triple net lease, the tenant generally pays property taxes, insurance, and maintenance in addition to base rent, leaving the landlord with limited day to day responsibility for the physical property. This structure generally differs from a gross lease, where the landlord generally covers most or all of these operating expenses out of the rent collected.

Tenant Credit and Lease Term

Because the value of a triple net property generally depends heavily on the reliability of the tenant's rent payments, investors generally focus closely on tenant credit quality, often generally favoring a national or regional tenant with an investment grade credit rating and a longer remaining lease term. A Las Vegas exchange buyer generally evaluates these factors alongside location, since even a strong tenant in a weak location generally carries more risk than the credit rating alone would suggest.

Why NNN Property Generally Appeals to 1031 Exchange Buyers

A single tenant triple net property generally offers a straightforward, well documented lease that generally simplifies underwriting within the compressed forty five day identification window, and the relatively passive management profile generally appeals to exchange buyers moving out of a more management intensive property, such as a multifamily building the investor no longer wants to operate directly. Nevada's lack of a state income tax does not change the federal 1031 rules, though it generally does factor into the after tax return calculation for a Las Vegas based investor.

Risks to Weigh in NNN Investing

Triple net property generally carries its own risks, including tenant vacancy risk if the tenant does not renew, exposure to changes in the tenant's underlying business, and generally limited upside compared to a value add property where the investor can actively improve performance. This overview is general and educational, and any specific NNN acquisition should generally be reviewed with a financial and tax advisor, particularly when it is being considered as part of a 1031 exchange with a fixed deadline.

Comparing NNN Property to Other 1031 Replacement Options

Against other common 1031 replacement property types, a single tenant NNN asset generally offers less diversification than a multifamily property with many tenants, but generally requires less active oversight than a value add commercial property, positioning it as a middle ground for investors who want reduced management responsibility without moving into a fully passive fractional structure like a DST. A Las Vegas exchange buyer generally weighs this tradeoff against their own management preferences and the remaining time left in their identification window.

Sourcing NNN Property Within the 1031 Timeline

Because the forty five day identification period is generally fixed and cannot be extended, an exchange buyer specifically targeting NNN property generally benefits from beginning the property search before the relinquished property even closes, working with a team experienced in nationwide net lease sourcing to build a shortlist of qualifying candidates. Las Vegas based investors pursuing an out of state NNN replacement generally need to factor in additional review time for unfamiliar markets, tenant types, and local lease customs before finalizing an identification.

Reviewing the Lease Document Itself

Before finalizing an NNN acquisition, a buyer generally should have the actual lease document reviewed line by line, confirming exactly which expenses the tenant covers, whether there are any landlord responsibilities carved out of the triple net structure, and what remedies exist if the tenant fails to pay taxes or insurance directly. Relying on a summary description of the lease rather than the underlying document itself is one of the more common mistakes a first time NNN buyer generally makes, and this review should generally be completed with an attorney before the exchange deadline arrives.

Frequently Asked Questions

TRIPLE NET LEASE (NNN) INVESTING FAQS

What expenses does the tenant generally pay in a triple net lease?

Generally property taxes, insurance, and maintenance, in addition to base rent, leaving the landlord with limited day to day property responsibility.

Why do 1031 exchange buyers generally favor triple net lease property?

Generally because of the relatively passive management profile and the straightforward lease terms, which generally simplify underwriting within the forty five day identification window.

Does tenant credit quality generally matter in NNN investing?

Generally yes, since the property's value generally depends heavily on the reliability of the tenant's rent payments over the lease term.

Is triple net property risk free?

No. NNN property generally carries risks including tenant vacancy and exposure to the tenant's underlying business performance.

Does Nevada's lack of a state income tax change the 1031 exchange rules for NNN property?

No, the federal rules generally remain the same, though the lack of a state income tax generally affects the after tax return calculation.

Does a single tenant NNN property carry more concentration risk than a multi tenant property?

Generally yes, since income generally depends entirely on one tenant, which is why tenant credit quality and lease term generally deserve particularly close review before acquisition.

Does an absolute triple net lease generally cost more upfront than a standard triple net lease?

Generally an absolute triple net property, given its lower landlord responsibility, generally trades at a somewhat lower cap rate, meaning a higher relative price, than a comparable standard triple net property with similar tenant credit.

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