What Are NNN Properties?
NNN properties are a type of commercial real estate in which the tenant is required to
pay the landlord’s cost in addition to the monthly rent. NNN properties require less
management (“zero-landlord responsibility”), provide good returns, and have long term
leases in place. Unlike other investment properties
The returns on NNN properties are higher as well – around 6.5% industry wide,
compared to 5.5% average in multifamily , and require significantly less management.
Investor and institutional money cashed on this trend, accelerating investment in NNN
properties that continues to this day.
We often see buyers who enter the NNN market without knowing what they are actually
buying. This confusion and misunderstanding is entirely avoidable if investors have
access to the content of the lease and professional advice to guide them.
NNN leases are long – sometimes 50 pages long with several amendments.
Why Should You Invest in NNN Properties?
They are safer than other investments
They earn better returns than other investments
They have zero management responsibilities; they are a passive investment
They pay no expenses because the tenant pays all property insurance, property taxes and capital expenditures
Cash flows are very predictable and are not subject to market fluctuations
The investor owns the property outright, unlike investing in a group investment
The Investor is always in control
The value of the property is stable
There are attractive tax benefits which allows the investor a greater return
Triple net leased properties are usually easier to sell than other types of properties
What Is a 1031 Exchange?
A 1031 exchange, also known as a like-kind exchange, is a property exchange rule that allows real estate investors to buy and sell investment properties while deferring payment on all or some incurred capital gains taxes at the time of the exchange. The term "1031 exchange" comes from Section 1031 of the U.S. Internal Revenue Code (IRC), which allows for this procedure.
What's The Procedure?
1. Retain a Qualified Intermediary
Once you have decided to initiate a delayed 1031 exchange, begin by retaining a qualified intermediary. The qualified intermediary is a person or company with no stakes in the exchange that manages the funds involved. The intermediary holds on to the proceeds from the sale of your property, then transfers the funds to the seller of the replacement property or properties.
The reason for this third party is to allow for delayed exchanges and ensure the funds from the sale are held in a way that enables them to remain untaxable until the time limit for the 1031 exchange passes.
2. Identify up to three Properties
The seller has an identification window of 45 calendar days to identify a property to complete the exchange. Once this window closes, the 1031 exchange is considered failed and funds from the property sale are considered taxable. Due to this slim window, investment property owners are strongly encouraged to research and coordinate an exchange before selling their property and initiating the 45-day countdown.
3. Purchase a Replacement Property
Once the replacement properties are identified, the seller has a purchase window of up to 180 calendar days from the date of their property sale to complete the exchange. This means they have to purchase a replacement property or properties and have the qualified intermediary transfer the funds by the 180-day mark.
This window may be shorter if the due date of the income tax return for the tax year in which the previous property was sold falls within the 180-day window. In which case, the sale is due by the tax return date. If the deadline passes before the sale is complete, the 1031 exchange is considered failed and the funds from the property sale are taxable.
Another point of note is that the individual selling a relinquished property must be the same as the person purchasing the new property. The name must match between the tax returns and titles of the old and new properties for the exchange to qualify for the 1031 rule. The only exception to this rule applies to cases of single-member limited liability companies (SMLLCs).