NNN properties can be quite lucrative for investors who are looking for a long-term, low-touch, and high-return investment property. Triple net lease property investments are a low-risk way to build equity and gain a consistent investment revenue stream, but as with any commercial real estate transaction, there is a specific process that must unfold successfully for an NNN property transaction to be completed.
Why are triple net leases a good investment? Because single-tenant triple net (NNN) properties can provide some of the most reliable income streams in the commercial real estate investment industry. Period.
NNN properties provide investors with a relatively low-risk (and very low touch) option for creating a consistent, long-term revenue stream. In a triple net lease, the tenant pays an agreed upon, monthly rental amount in addition to covering a majority of operational costs associated with the property, such as: annual property taxes, insurance, and maintenance costs.
Triple net lease (NNN) properties are often very attractive to investors who are seeking out an investment with consistent, equity-building returns without having to be involved in the day-to-day obligations and financial responsibilities of the property. NNN leases are also structured over a long period of time (usually anywhere from 10-25 years) so they can be an opportunity for consistent, long-term earning potential from the investment standpoint.
Investing in commercial real estate can bring about many advantages in the form of low-touch income or a diversified portfolio. But not all commercial leases are the same, and even leases of the same type can have varying factors and deal details. In short, every commercial lease is usually as unique as the property itself, so it’s very important that you understand all the particulars and fine print of any property you’re considering adding to your portfolio.
1031 exchange real estate can present great opportunities for investors who want to move seamlessly from one property to another, while obtaining tax benefits on sale proceeds that provide them with more capital to put into a new property.
However, in order to get all the tax benefits of a 1031 exchange, a deal must meet specific parameters and a specific set of rules and timelines must be met throughout the entire process and the necessary transactions.
You can consider this guide the CliffsNotes for 1031 exchanges or a 1031 exchange for Dummies handbook, which will provide an overview of 1031 exchanges and explain all the rules, eligibilities, and timeframes that you need to know if you’re considering changing or upgrading the properties in your investment portfolio.
What is a 1031 Exchange?
A 1031 exchange is the commercial real estate investment term derived from the Internal Revenue Code (IRC), section 1031, which states, “No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment.”
Essentially, 1031 exchange properties allows an investor to sell a property and then use tax-free profits from that sale toward the purchase of another investment property that is of similar value (or greater).
A 1031 exchange can be extremely advantageous for investors who are looking to diversify their portfolio with a more profitable property type or move into a different, more passive type of investment.
For example, at Sands Investment Group, we’re seeing a shift in investment strategy that leverages the 1031 exchange. Many of our buyers are investors who are looking to sell an existing, high-touch investment property (such as an apartment complex) and use the tax free proceeds of a 1031 exchange to invest in a triple net (NNN) lease property that provides conservative, consistent returns, but doesn’t require landlord duties or heavy owner involvement. NNN lease properties offer a more passive income stream, and we’re seeing more and more investors opt for this route via the 1031 tax deferred exchange deal.
1031 Exchange Guidelines
A 1031 exchange can be an ideal solution for an investor who wants to move quickly out of one investment property and into another, without having to worry about taxed capital gains or paying income taxes on the sale of an existing investment property.
Along with the tax deferral opportunity inherent in the 1031 exchange comes a set of very specific rules, regulations, and timelines that must be adhered to in order to qualify for this type of deal and reap the full benefits.
We’ll now discuss those important 1031 exchange rules, timelines, and other factors influencing this type of investment.
Like Kind Exchange Properties
In order to pursue a 1031 exchange, both the existing property being sold and the new one being purchased in the deal must meet like-kind property requirements. The like-kind rule doesn’t necessarily apply to the quality of the properties, but dictates that properties exchanged must be similar in value and type and fall into the classification of “real property.”
The two properties must also be used for investment or income purposes, and cannot be for personal use. To achieve full 1031 exchange benefits, it’s also best if the property being purchased is of equal or greater value of the property being sold.
The price difference between properties in a 1031 exchange is known as a “cash boot.” If the new property being purchased in the exchange is less than the existing property that was sold, the price difference is taxable. So it’s advantageous for investors to find a replacement property as close in value to their existing one as possible, to fully take advantage of the 1031 tax exchange benefits.
Like-kind property types apply only to “real property” including land, commercial buildings, residential buildings, but no other types of assets can be used in the exchange. For example, an investor can exchange a piece of commercial land for a vacant lot, or they can sell an apartment complex for a tenant-occupied business property. However, a piece of land or an investment property cannot be exchanged for stocks or other non-property type assets in an exchange.
Transaction Expenses: What’s Covered by 1031 Exchange Funds (and What’s Not?)
Some expenses related to a 1031 exchange transaction can be covered with funds in the deal, but there are other expenses that aren’t included.
Costs that can be covered by 1031 exchange funds:
- Broker commission
- Legal and tax advisor fees associated to the deal
- Filing fees
- Title insurance
- Finder fees
- Escrow fees
Costs not covered by 1031 exchange funds:
- Insurance premiums
- Property taxes
- Repairs or maintenance
1031 Exchange Timeline
A very strict and specific set of 1031 exchange time limits and deadlines must be adhered to over the course of any 1031 exchange deal.
Here’s a basic timeline of how a 1031 exchange timeline unfolds.
- The investor sells their existing property.
- The funds from that sale are transferred to a qualified intermediary to hold in escrow for the next sale.
- Upon the sale of their existing property, the investor has 45 days from the sale date to identify the new property they want to buy in the exchange, and make an offer.
- The intermediary will transfer funds for the purchase of the new property upon accepted offer.
- The 1031 exchange deal must be finalized and close within 180 days of the sale date of the first property.
Timeline Specifics for Identifying a New Property in a 1031 Exchange
As noted above in our timeline of a 1031 exchange, an investor has 45 days (from the sale date of their existing property) to identify the property they would like to purchase in the exchange. There are a few different distinctions on identifying properties that are important to know when scoping out new investment properties.
An investor needs to look for a replacement property according to these guidelines:
- Three-Property Rule: The three-property rule allows an investor to identify up to 3 properties that they’ll potentially purchase in the 1031 exchange. The market value of the 3 properties isn’t held to any restrictions in this rule.
- 200% Rule: The 200% rule says that an investor can choose as many potential replacement properties as they like, so long as the cumulative value does not go over 200% of the existing property being sold.
- 95% Rule: The 95% rule states that an investor can identify as many potential properties as they want, as long as they can be acquired at 95% valuation or more.
Qualified 1031 Exchange Intermediaries
A key component of a 1031 exchange is working with a qualified, reputable intermediary. As outlined in the timeline above, the intermediary will play an integral role in moving and holding funds securely so that capital can be moved from the sale of one property into the investment of another without any tax implications.
In the sale of a property, proceeds from that sale remain taxable unless they’re passed through an intermediary. The funds cannot be disbursed directly to the seller and be eligible for the tax breaks outlined in a 1031 exchange.
An effective 1031 exchange intermediary oversees all the transactions involved in a 1031 exchange. They need to be able to hold funds in escrow for the sale of first property, and keep them there until it’s time to send funds over for the purchase of the replacement property. The intermediary needs to be a partial third-party, and should not have any formal relationship with anyone involved in the transaction other than facilitation.
What is a Reverse 1031 Exchange?
You may be wondering, “What if I want to purchase a new property before selling my existing investment property? Is the 1031 exchange still a viable option?”
The answer is yes, you can with a Reverse 1031 exchange. However, like with a traditional 1031 exchange, there are some rules you need to consider.
In a Reverse 1031 exchange, an investor can purchase a new property first, but that property must be held by a qualified intermediary until the other property sells. The existing property must be sold within 45 days of the purchase date of the new property, and the deal must be finalized and closed within 180 days of the purchase date.
1031 Exchange Companies
A 1031 exchange can be an advantageous way to transition into a new investment strategy or diversify your portfolio while also benefiting from the tax deferral that helps move more of the sale proceeds into the new property purchase. But the process is intricate and driven by very strict rules that must be met in order to benefit from the tax cut in a 1031 exchange. It’s not a process you want to go into alone or unprepared.
As such, it’s best to approach the 1031 exchange process with the help of skilled professionals who understand the market, know exactly how to move 1031 exchange transactions along smoothly, and can act as trusted advisors during the whole process.
Sands Investment Group has extensive 1031 exchange experience, and can help you navigate all the rules to ensure you make the best choices and obtain the full benefits of the deal. Our client-focused approach, extensive connections, and marketing expertise are just a few of the ways we’re leading the industry. In fact, we’re the fastest growing net lease investment company in America, with over 1,900 transactions in 48 states (to the tune of $4.5 Billion) since 2010.
Want to learn more? Get in touch with an expert today by calling 844.4.SIG.NNN or sending us an email at info@SIGnnn.com.
More and more savvy investors are choosing to add NNN properties to their portfolios. But, why are investors flocking to triple net investments?
Very broadly, NNN lease properties present a relatively low-risk, low-touch investment that provide consistent, dependable returns (with none of the extensive landlord duties that come along with other types of investment properties).
However, to find the best NNN investment opportunities that will bring you the full rewards and potential, you need to locate the properties with the most advantages and the best tenants.
Triple net lease real estate offers both investors and tenants many unique opportunities and benefits, but there are also limitations that don’t necessarily outweigh the rewards of this type of commercial lease, but are important items both parties must consider before deciding if a triple net lease is the best option to fulfilling their goals.
Investing in triple net lease real estate is a great way to diversify your portfolio, create an income stream, and build equity all at the same time. NNN properties typically have great locations with good traffic and strong, proximal businesses in the area. This lease type also comes with a long-term, qualified business tenant in place to ensure the longevity of your investment.
Triple net lease real estate is popular among investors who want to add a consistent revenue stream to their portfolio through monthly rent payments from tenants. A key advantage in a triple net lease is that a tenant usually takes on the majority of operating costs on the property, which makes it a low-risk and low-touch investment for a property owner, with stable income each month.
Triple net real estate is very beneficial to investors who are looking for a relatively low-risk investment (with little to no involvement as a landlord) that provides solid, predictable returns over the long-term.
NNN locations tied to established brands like Starbucks can be especially coveted in net lease real estate because they typically come with a recognizable brand, premium locations, and the potential for growing returns as the property owner. Read more
Net lease real estate is attractive for conservative investors who are looking for long-term profits and benefits from their investment in a property. In addition to net lease opportunities on existing structures, there is another avenue of revenue you can explore for your portfolio-ground leases. Read more
Net lease real estate offers an array of benefits for investors who are looking for a stable source of income, without the bulk of expenses and landlord duties that come along with property ownership. In a triple net lease, the tenant assumes the majority of expenses associated to the property (in addition to monthly triple net rent) where they’ll operate their business, such as:
- Maintenance and Repairs
An industrial gross lease (also called a modified gross lease in some markets) is a type of commercial real estate contract that is often used to create a mutually beneficial deal between the property owner and the tenant on an industrial or warehouse property. In an industrial gross lease, the tenant is responsible for some (but not all) of the operating expenses of the property, which they pay to the property owner in addition to their agreed upon monthly rent.
Triple net lease real estate is popular for investors who want to add a low-risk, low-touch property that brings in consistent revenue each month over a long-term period. In a triple net (or NNN) lease, 3 important financial responsibilities (each represented by “N”) are typically included and outlined it the contract:
- Insurance Premiums
- Maintenance, Repairs and Upkeep
But each deal is as unique as the property itself, so it’s important to know these three aspects of NNN expenses (from the standpoint of an investor and a tenant) to make sure you choose the best investment for your portfolio. Read more
Net lease real estate is rich in opportunity for both property owners (who can obtain a steady income steam on their investment) and the tenants (who occupy a space where they run their business). There are different variations of net lease deals, in which the tenant and the property owner will each have different financial responsibilities for the property. These various net lease deal types typically fall into one of three categories, which, in order of popularity, are: Triple Net (NNN) Lease, Double Net Lease, and Single Net Lease.
Triple net lease real estate is popular among investors who want to create a stable income stream from regular, triple net rent in their portfolio. Triple net leases typically offer such an opportunity by providing long-term earning potential without the obligations that typically come along with being a landlord, such as taxes, insurance, or maintenance on the building to keep it in top operational order.
A modified net lease is a deal variation or compromise that usually falls somewhere between the terms of a gross lease and a triple net lease. Each modified net lease contract is unique to the property, but there is generally a split of financial responsibilities between the property owner and the tenant to make the deal beneficial on both sides.
A modified gross lease can be best understood through comparison, as it represents a middle ground between a full-service gross lease and a triple net (NNN) lease.
In a gross lease, the property owner is financially responsible for the building, and covers all the expenses associated to its operation (including taxes, insurance, and maintenance). To help recoup some of these costs, the property owner builds them into the monthly rent amount that a tenant pays for use of the building. The property owner pays all of the expenses associated to the building, in exchange for a monthly, all-inclusive rent sum.