When it comes to investment properties there are loopholes which create many options. For instance, Section 1031 of the IRS tax code permits real estate investors to sell their investment properties and in return allow a trade for comparable or similar matched investments in order to defer the tax as the capital gains amass. It seems that real estate is truly the most popular transaction permitted by this code. Something called the Triple Net or NNN otherwise known, as Leased Real Estate is considered appropriate as alternate property during such a transaction. What this really entails is a Net lease where a tenant foots the bill for all or most of the properties' active expenses over and above the rent. It is important that before we discuss the particulars of Net lease that we have an understanding of other kinds of leases as each serves a different purpose.

First there is the bond lease that makes the tenant completely accountable for active expenses encompassing the property's operating costs, which include regular maintenance, repairs and substitute costs for replacing materials etc. Second there is the Triple Net or NNN lease, which incurs actual restrictions on capital expenses. The tenant must pay for property expenses including tax, insurance and maintenance, as under this kind of lease, these are the tenants responsibility. Third taking from the NNN lease is the Net Net or NN lease. This is somewhat the same as NNN lease but returns the responsibility of the physical up keep of the structure to the landlord. They must make sure major items such as the roof are in good working order. Lastly the Modified Net lease infurs that the tenant pays for everything including utilities, maintenance, repairs and insurance. They do not pay property taxes.

For the NNN situation first the situation may allow less property management issues to be a problem for the investor. This is especially true for investors dealing with multi-family units, complexes considered commercial because they want the profit and income without the hard work or heartache. They also want to postpone their tax accountabilities without having to play the role of landlord 100% of the time. Savvy investors use NNN leases because they insure income but still allow for ownership to stay in their name and portfolio while maintaining a good level of capital. Another aspect of the NNN is that it also makes the transfer of real estate to beneficiaries easier.

Still one must use caution when entering into this type of lease. While NNN 's may be desirable, they be difficult if the investor does not have a full understanding of how the lease structure operates or that the lease term which could be as long as 50 years. For the commercial investment property, one must understand the value involved with the lease. Sometimes the lease is worth more than the actual property or land when determining the value of that piece of real estate.

Due Diligence

As we have touched upon before, there is a certain amount of due diligence expected with every real estate transaction. For this subject, I think understanding how the NNN lease works is significant because there are different degrees involved and one needs to know exactly what they agreeing to before investing. You need to have a complete picture of the situation, not just the property but also of the lease document, tenants involved, and the type of seller. I mean finding the right property takes time and energy. It is in the investors best interest to have a copy of the lease upfront in order to analyze the details completely before taking issue with other due diligence aspects of the deal which can include but not only extend to inflation or in this market devaluing, tax risk, credit candidacy and property usage.

Matters of long-term appreciation or depreciation especially in the current market are important to analyze. Will the situation be worth a year from now, ten, twenty years from now? Inflation is a big whopper with investors because they want to see profit not loss with an investment property. Sometimes it is easy to forget that yearly increases of rent and other expenses may allow for a healthy situation as opposed to a cut in profit. Still it is important to consider especially in a NNN lease because over the life of the lease, 20 or 50 years, the rent could actually decrease as regular dependable income for the investor. It's a little like rent control in New York City. It is thought that eventually the landlord will not owe on a mortgage 30 years down the line and therefore the income potential goes down for them. Still these leases are becoming like dinosaurs, extinct in this market but still something to remember when reading the lease in the beginning.

It is hard to forget the issue of tax risk, really it is on a lot minds especially in high tax areas of the country but for the NNN deal, one must evaluate this closely. Don't forget it is not just state tax but also on the local level that may influence hikes over the years. It may be that the taxes are reassessed after the sale finalizes which in turn creates a new situation of risk for the investor that might not be covered in the lease. This can be unexpected.

In this new world market of failing economy of course credit issues are significant. One must look at the full picture. Is the property going to be worth it? Of course the value of the lease may speak for itself but one must also consider the quality of the present tenants. Will they stay and pay on time? This is hard to debate right now but also crucial to the success of the lease. The current property price should match the tenant's ability to pay and continue with the lease. You must consider the Capitalization rate or the annual rent divided by purchase price. This will shed some light on the amount of risk involved for the investor. If there is a high amount of risk, it indicates that over time the tenant will no longer be useful to the life of the lease. Still the capitalization rate should accurately mirror the increase in risk absorbed.

For cases where the property involves the commercial use of a publicly trade organization like in the case of a drugstore like Rite Aid; information on the organization is easy to find on the Internet or the corporate communications office. It is a little more difficult to figure out for mom and pop type places that are either family owned or privately managed. One example remains stunning to many involved in such transactions was the case of Vicorp Restaurant, Inc.'s filing a bankruptcy of Chapter 11. This was a private corporation and not privy to sharing its accounting information with outsiders. Still the investor should not be too wary because there are investigative tools used by underwriting companies provided at a fee to uncover such details before the deal is at the table. Suffice it to say that if your broker is any good, they will do the research for you and allow ample time to analyze any bad seeds involved with regard to risk. This will allow the due diligence process to continue but also to run smoothly.

Right now a prime; A grade credit rating is needed for any deal, really. Even with an approval in hand, another important aspect to think about is how the kind of business will influence the investment's value over time. Typically general use properties that have been turned into multiple tenant complexes are most desirable amongst investors, more so than single or two family homes. For instance a manufacturing facility is a good example of how this works well because it specific to the tenant's needs and not much analysis of the market is needed for success.

With this in mind, it can be typical with Triple Net lease situations that the purchase price does surpass the replacement costs involved with consideration of comparable sales at a per square foot basis. You should be concerned about future rents especially if you believe the current rent is unrealistic for the market and future tenants are not as credit qualified.

Types of NNN Sellers

There are three groups of sellers within the NNN scheme. There is the Investor Owner, Owner User and Build to Suit Developer. For the Investment Owner, the initial lease agreement will have a restricted amount of time remaining. It is important to consider the base amount of rent when compared with the payment/expense history, but also the sales volume history to determine the likelihood of the tenant after the deal. The Owner User kind of seller wants the NNN lease used because it is perfect for them. They can remain a tenant while unburdening their amount of risk with respect to capital and freeing up funds to grow their business. This is a smart move because a lot of times real estate does not see the level of return on investment a viable business would see in a month or year. Because the owner user has the option to buy back the lease, these leases tend to be very liberal in the wording. Still any investor should be thinking about the terms of the lease and especially the rates of rent increases and the possible improvements the seller user is making to improve the business. It may be that the investor does not see any profit off that at all. Lastly with the build to suit that is usually a developer of sorts, this seems to be out of the three, the easiest to deal with in this agreement. They know what they are doing because they are in the industry, professional and they have a system in place. All the information privy to the deal is available. They know what they want from the building and have clear assets, accounting sheets for your perusal. These types of sellers will have a general lease agreement that remain clear and concise which means less risk to you. Still it is not a perfect set up because there seems to be a limit to the performance of the investment for the property. As a part of the research, you would want to take a look at the developer's past projects to get a better idea of their success.

What you should keep in mind when thinking about an NNN investment is that when they are well written, due diligence and underwriting procedures have been followed carefully, they can be a desirable situation for all parties involved while being feasible for execution of Section 1031 replacement property. What is desirable about the situation is that the lease reduces the amount of time and energy an investor must play landlord and typically the leases are longer with well-qualified tenants. Still remember due diligence is an important step here, more so than other real estate transactions. It is important to keep in mind the following concerns when thinking about this kind of lease:

• Is the lease a true NNN?
• Will the tenant continue to prosper at the location?
• What are the current local tax issues of any and what will be your level of involvement at the local level to affront this issue?
• Is this an inflation resistant property and will its value bounce back in this economy?