Net Leased Properties

What is a Triple Net Leased - Fee Simple Property?

Fee simple ownership is an estate in land and it is the most common way real estate is owned in common law countries. It represents absolute ownership in the property. It is fair to say that in all probability the home that you own is fee simple ownership. Fee simple owners can also enjoy passively managed real estate investments, though through what is referred to as a Triple Net Lease. A Triple Net Lease is an arrangement in which the tenant pays rent as well as the taxes, insurance and maintenance expenses that arise from the use of the property. Frequently, a tenant is procured prior to constructing the building, a long term lease is signed and the real estate is sold to an investor, with the lease attached. The structure is most commonly used when the tenant occupies the entire building. Examples of these types of properties are Home Depot, Walgreens, CVS, McDonalds and Starbucks. Besides triple net leases, there are other varieties of passive and partially passive net leases. For example, in a Net-Net or Double Net Lease, the owner is responsible for “roof and structure”, but the tenant is responsible for all other maintenance and improvements.

With triple net arrangements, the monthly lease provides a predictable, long-term income stream to the owner. Additionally, the leases typically call for increases in the rental rate over time as a hedge against inflation. Investors seeking ways to simplify their lives and reduce time spent on managing their real estate assets should consider fee simple, net leased property.

Why would a large company such as Home Depot or Starbucks lease their property?

These firms are not in the real estate business. Using long-term leases takes the real estate asset and subsequent debt off of their books and places it on the investor’s. The net lease arrangement allows the company to control the use of the property for a long period of time without a large cash outlay, allowing the company to redirect the assets to their core businesses, in this case, hardware and coffee.

Who is buying net leased property?

REITS and Institutional investors are large buyers of net leased properties. Those seeking to simplify their real estate holdings, reduce time spent in managing property, increase the quality of their tenant and engage in a 1031 Exchange are the typical individual investors in net leased property.

Who arranges the financing?

Unlike tenant in common investments where the financing is packaged in to the investment, net lease, fee simple property requires buyer financing. There are many national lenders that provide financing. While credit of the borrower is important in the credit decision, the lender heavily weighs the credit rating of the tenant. Credit ratings are determined by Standard & Poors (S&P) or Moody’s, to name two. Financing rates for real estate with investment grade tenants (BB- for S&P and Baa3 for Moody’s, or higher) tend to improve the higher the credit rating.

How liquid is the investment?

The investor controls when to buy or sell fee-simple, net leased properties. Due to the rise in real estate investors engaged in Section 1031 Exchanges, net leased properties have become an increasingly well-known mechanism to cover an investor’s need for replacement property. The investor pool is larger for lesser valued properties (less than $1.5 million). As with any real estate investment, care should be given to performing due diligence on the purchase. Highest and best use, creditworthiness of tenant, terms of the lease, condition of building, usefulness and location of property and competitive cap rates are a few of the items that will determine the attractiveness of the real estate to the market.