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.
Triple net leases are unique from other types of commercial investments in that operational costs, taxes, and insurance are typically passed through to the tenant to absorb as business expenses, whether in full or partial amounts shared with the property owner. As a result, triple net lease properties are often referred to as Net-Net-Net (NNN) properties because each “N” signifies an expense that the tenant pays in addition to their monthly rent:
- N = Annual Property Taxes
- N = Insurance Premiums
- N = Maintenance and Upkeep Costs
NNN lease real estate provides both investors and tenants with an array of great advantages. As an investor you can add a reliable income stream to your portfolio (without adding landlord duties to your daily work) and the tenant obtains a desirable location to build an established business footprint.
But how do you qualify for a triple net lease? Our recent post covers NNN lease qualifications for investors and also explains the important tax implications and insurance considerations you need to take into account as you’re making your investment decision.
How to Qualify For a Triple Net Lease
NNN lease investments can be highly advantageous, but only if they match your investment goals, qualifications, and criteria. You can use our quick checklists below to determine if NNN lease properties will fit into your strategy and know if you’ll qualify easily for this type of investment.
A NNN lease property may be perfect for you if:
- You’re looking for a relatively low-risk property investment.
- You want to build equity in your investment portfolio.
- You want to transition out of high-touch property types (like apartment complexes) and into an investment with more passive income potential.
- You want to diversify your portfolio by adding another income stream.
- You want an investment property that provides you with consistent returns over a long period of time.
- You don’t want to take on the responsibilities and obligations of a landlord.
Your chances of qualifying for a triple net lease property are best if:
- You have a strong credit profile and rating to qualify for financing options.
- You have a good history of buying, selling, and managing investment properties.
- You have equity or funds from other ventures you can put toward your investment.
- You have an investment property you want to sell and then use those funds toward a NNN investment with significant tax advantages in a 1031 Exchange*.
*Basically, a 1031 Exchange property allows for the profits from a qualified property sale to be held and used (tax free) toward another investment property that is of similar type and value.
If you own property that is higher risk with more landlord involvement than you want or you’re looking to diversify your portfolio with a low-risk, low-touch NNN investment with passive income streams, then a 1031 exchange can be very advantageous for your goals.
At Sands Investment Group, we’ve helped many buyers who want to change their investment strategy by transitioning into a more reliable, low-touch investment like a NNN lease. For example, we’ve had investors with apartment complexes who want to sell those properties then use the tax free funds from the sale to invest in a triple net lease property that is lower-risk, has no landlord responsibilities, and provides a reliable income stream to their portfolio. NNN lease properties provide a relatively passive income stream, and we’re helping investors shift their investments via the 1031 tax deferred exchange deal.
NNN Lease Tax Considerations
NNN leases provide some unique advantages when it comes to taxes and deductions and are the only commercial lease type that is recognized by the IRS and the courts as being free from taxes for the property owner. In all other types of commercial and net lease real estate, the property owner is legally obligated to pay taxes on their investment (whether in full or as a shared business expense with the tenant in place at the investment property.)
It’s imperative to remember though, that every NNN lease is going to be as unique as the property itself, with its own terms and financial responsibilities outlined in the deal. While taxes are generally considered a tenant obligation in a NNN lease, the breakdown of tax responsibilities are all subject to what is negotiated and clearly outlined in the actual lease contract. It’s important to know the exact terms of any NNN lease property you’re considering so you know exactly what you’re responsible for financially as the property owner.
Triple Net Lease Tax Consequences
Even though annual property taxes on a NNN property are usually the responsibility of the tenant, you’re still open to some risk when it comes to tax payment and timing.
If your NNN tenant fails to pay taxes or makes late payments, it can mean hefty fines or incarceration depending on the severity of the situation. This can cause issues for you as an investor if this leads to financial hardship for your tenant and perhaps even open you up to some risk as well depending on how your NNN lease is structured to allocate tax responsibilities between the tenant and landlord. Your tenant’s business could potentially collapse under the weight of the fines and lead to tenant turnover or vacancies.
All of these scenarios mean lost profits for you as the property owner, so it’s important that you have reliable, business-savvy tenants in place at your NNN property who understand tax consequences and are committed to staying current with tax payments as part of operating their business in your building.
Triple Net Lease Tax Deductions
In general, tax deductions for triple net lease properties are usually to the tenant’s advantage. Since the tenant in a NNN lease covers all (or a majority) of operational expenses on the property, they can do tax deductions related to business costs that a property owner cannot.
A question we’re asked frequently though is, “Do triple net leases qualify for a 199a deduction?”
First, a 199a deduction (also known as the 20% Pass Through Deduction) allows business owners to deduct 20% of their qualified business income for certain types of Schedule C businesses (like rental businesses and income from partnerships or S corps). The Safe Harbor section of 199a doesn’t apply to triple net properties, but it doesn’t necessarily prevent it either if you meet a set of requirements outlined in section 162 as a trade or business.
So, this is another area of NNN leases that is a bit tricky to navigate. It’s important to consult a qualified tax advisor to fully understand where your NNN property falls into the guidelines for this deduction.
Triple Net Lease Insurance Costs and Responsibilities
While insurance policies, deductibles, and claims will usually all fall under the responsibility of your tenant in a NNN lease, there can be exceptions or unique clauses that divide insurance responsibilities or dictate that obligations to certain policies are shared between the property owner and the tenant.
Sometimes the property owner will need to be listed on certain policies (even though the tenant is responsible for payment on the premiums). There may also be certain policies that you should have as the property owner (such as protections against floods, earthquakes, and other natural disasters that aren’t covered in the policies your tenant will be paying).
If you’re purchasing a NNN property with a tenant in place (and insurance terms are already outlined in the contract) you should make sure you fully understand all the fine details and know exactly what insurance costs (if any) you will need to account for as the owner. If you’re setting up a lease with a new tenant, you should carefully negotiate these terms.
Consulting with an expert in the industry, such as a net lease advisor, as you consider your NNN investment property options can be highly beneficial to you and your long-term success as a triple net property owner. An advisor with expertise in the intricacies of NNN deals can help you carefully navigate terms surrounding insurance, taxes, and more. Leveraging this knowledge in the buying phase will help you select a NNN property that will fulfill your investment criteria and eliminate any surprise expenses down the line as a property owner.
Sands Investment Group is an esteemed team of experts in the net lease industry, and we have the experience and expertise to help you navigate the intricacies of your NNN deals (including taxes, insurance, and qualifying for funding). In fact, we’re the fastest growing net lease company in America, with over 2,100 transactions in 48 states (to the tune of $4.5 Billion) since 2010.)
Get in touch with an expert today by calling 844.4.SIG.NNN or sending us an email at info@SIGnnn.com.