Triple net lease - Posted by John

Real Estate Investing Retail
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Posted by Frank Chin on January 01, 2006 at 12:34:31:

WAREIA:

NNN for residential properties is not unheard of. But because large apartment buildings can be sold as coops and condos, its an easier way of splitting property interest as compared to splitting land, building and grounds. Then, since many residential units are “owner coocupied”, a tax free sale eliminates another big reason for doing an NNN lease.

Another big obstacle is I beleive landlord tenant laws, where “fee owner” is held responsible for providing a habitable space. But there are cases where investors buy Long Term NNN master leaseholds from “fee” owners on residential properties, act as the landlord, and in turn lease units to tenants.

Another good reason is residential investors never heard of NNN leasing.

But I see more NNN in residential for this reason. Because “baby boomers” will live longer, and own expensive real estate, where a Manhattan brownstone can cost several million dollars, they may to too old to manage the place, but still want to keep it for their heirs. Then, because the land and building is so expensive, it’ll be easier for an investor to NNN the property, make money on it for a number of years.

The investor who does NNN leasing tells me that often, the NNN leaseholder winds up buying the underlying property at a good price upon the owners death because the heirs often want quick cash right away instead of waiting years for the NNN lease to expire.

One good example of how the NNN lease was utilized was reported in the local papers a few years ago. A Manhattan landlord of a brownstown was convicted of murdering his tenant, and sentenced to 25 years to life. Since he was relatively young, he NNN the property to an investor on a long term NNN lease basis.

In the meantime, he’s got a landlord for the place. Then, in 25 years time, when he gets out of prison, he’s got a place well taken care of, and presumably would have gone up in price tremendously.

There’s no reason why NNN leases can’t be used in residential properties. It’s not as common as there appears to be less applications. But a landlord going to prison for 25 years or more is the perfect application.

Frank Chin

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Triple net lease - Posted by John

Posted by John on January 01, 2006 at 01:06:20:

Could someone explain to me what this is, and how it can be used?

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Re: Triple net lease - Posted by WAREIA

Posted by WAREIA on January 01, 2006 at 11:41:24:

NNN Leases are becoming more popular with regard to SFR investing, particularly with Lease Options and Purchases.

A triple net lease requires that the Tenant be resposible for virtually everything including Maintenence, Upkeep and Repairs. In other words, no Tenant or Toilet issues or calls in the middle of the night to Landlords.

Sounds good right? Well it can but, you need to be very careful especially when using them in Residential Real Estate. If a Tenant stops paying and needs to be removed from the property you may have a problem getting them out with a simple eviction. They MAY be able to claim that they have an Equitable Claim of Interest because the have been 100% responsible for the property and treated as an Owner which could result in you having to go through a Judicial Foreclosure instead.

I use them but only as part of a Beneficiary and Occupancy Agreement (NNN Lease) of a Title Holding Land Trust.

In 10 years I have only had to file for eviction one time. The “Tenant” took the Trust and Occupancy Agreement (NNN Lease)to her Attorney to forestall the eviction and he gave it back to her and told her she had to get out and there was nothing she could to except pay up or get out.

Frank seems to be very knowledgable on the subject. I enjoyed his post. Maybe he can shed some light on using a Triple Net Lease with Residential Properties.

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Re: Triple net lease - Posted by Frank Chin

Posted by Frank Chin on January 01, 2006 at 09:08:21:

John:

Triple net lease, called NNN for short. What is it?? The tenant leases up the place pays TAXES, MAINTENANCE and INSURANCE. The “fee simple owner” collects rent, and what he pockets, everything NETTING the above.

One common type is a long term NNN lease, exceeding 29 years, with many running 49 years to 99 years. Leases exceeding 29 years are considered Real Estate, where you can mortgage it, and do 1031 exchanges into it.

Why is this??

There are two main ways of RE investing. Owning it, OR controlling it. Often, controlling it is the cheap way of doing it. While this sounds simple, NNN leases are used in a variety of interesting ways, and solves many problems that a “fee simple” ownership cannot.

How can it be used??

  • Control vast amounts of real estate: For large chain stores, national fast food markets usually plan to open thousands of outlets a year, and its most efficient to let other invest in the land, in customized buildings, and let the chains lease them up on a long term bases to operate the business. Converesly, they couldn’t expand as rapidly if they had to invest vast sums into land and buildings.

  • Balance sheet management. For many years, leases are kept off balance sheets, mentioned in footnotes, but mortgage for land and buildings are listed as liabilities, making firms that borrow funds to put down payments, and make mortgage payments look extremely debt heavy.

  • Related to the above is SALE and LEASEBACK, that is, businesses sell the building that they operate from and NNN it back, usually long term. This allows them to CASH OUT huge chunks of assets. Big chain stores in the past found they owned floundering retail outlets, with most of the wealth in the underlying building and land. I was in the banking biz a while back, and extended credit to “Two Guys Department stores”, which for years made no money retailing. The parent company called Vornado sold all the land and buildings, NNN some of them back to operate flea markets, and invested the proceeds to build shopping centers. They now make tons of money in real estate, and is one of the largest Real Estate firms in the nation.

  • Realign Assets: Large companies with expensive headquarters like GM, Citicorp etc found the headquarters they operate from is worth billions, especially here in NYC. So, they sell the headquarters and NNN it back, putting the rest of the money into making cars, loans etc.

  • Get around deed restrictions. Columbia university owns a huge tract of land upon which sits “Rockefeller Center”. The land was deeded to the university as a gift stipulating that the land, a vast vacant lot at the time, CANNOT be sold. What the university did was to NNN lease it, had a vast office complex built on it.

  • Get some cash, still collect rent: One good example is Twin Towers of the World Tade Center in NYC, NNN by Larry Silvertein for 99 years. For years, politicians demanded the Port Authority, the owners, to sell the buildings and invest monies into political pork. The Port Authority beleive the best use of the assets was to SUBSIDIZE mass transit. So to make everyone happy, the didn’t do a “sale and leasback”, they instead created a NNN lease, sold the lease for cash, and then collect rent for 99 years. This allows them to have funds up front for “political pork”, and still have rent to subsidize transit for the next 99 years.

-Break Real Estate interest into different parts. Nowadays, its common to split via “Condos” Another way is to have someone own the land, others the building, and yet others the rights to use the building via NNN leasholds. The “Empire State Building” is owned this way, where one group owns the building and ground, and Donald Trump and others controlling the rest with NNN lease.

-Physical separation of assets: Another reason for breaking RE into parts is if the owner has to use the land, but let others own or control the areas above it, namely air rights. One example are railroads running into cities, with valuable air space above it. The air rights are either sold or NNN leased to others for development. The railroad holds on to the land to run the trains.

  • No cash down investing. One investor I know NNN shopping centers, and in turn NNN it to others, making him the sandwich leasehold position. For him, he can sell the sandwich lease for cash, or net the difference, and make income for years and years.

  • Estate planning: Cash out without paying large Capital Gains. The investor above gets elderly owners of shopping centers to NNN lease the place for an upfront option payment where they pay no capital gains. In addition, the elderly owners are free of hassles of ALL aspects of RE ownership, namely, paying taxes, insurance, and doing maintenance.

The main attraction for the elderly owners is they get to have some cash up front, have someone else worry about everything else (taxes, maintenance, insurance) and still have the place to give to their heirs.

There are other issues involving NNN leasing, but this are the basic ones.

Frank Chin

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Re: Triple net lease - Posted by Bill

Posted by Bill on January 01, 2006 at 08:05:44:

Triple net has a lot more to do with commercial real estate than any other. Basiclly Triple Net(NNN) is where a commercial tenant pays for any repairs to the building or parking lots,pay the proeprty tax and insurance in addition to paying rent. It is pretty common with business tenants and I woiuld think very very rare in residential. Most residntial tenants wnat no risk and wnat you to assume all risk in your expenses.

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More info please - was NNN - Posted by John Corey

Posted by John Corey on January 03, 2006 at 17:29:48:

Wareia,

You wrote:

“I use them but only as part of a Beneficiary and Occupancy Agreement (NNN Lease) of a Title Holding Land Trust.”

Can you point out where someone can find more info that is specific to what you are talking about?

As you also noted there is clearly problems with NNN for residential property as a landlord as a legal obligation (varies by legal jurisdiction) to provide safe and habitable housing so a ‘tenant’ can not held to all repairs. You seem to be changing the model a bit and I want to understand the subtleties.

BTW - I am assuming you are technically selling so you are not able to claim the property as a rental (land contract sale) and can not do a 1031 exchange. Is this correct?

John Corey