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INTRO TO TRIPLE-NET PROPERTIES

Triple-Net properties are some of the most highly sought after commercial real estate investments in the country. Net leased properties are appealing to a wide variety of buyers, from high net worth individuals to partnerships to large institutional investors like real estate
investment trusts, life insurance companies and pension funds.

Net leased properties also are very attractive to investors who need to do 1031 tax-deferred exchanges. Net lease assets give investors a stable safe alternative to the highly unpredictable and volatile stock market. Net lease properties are often referred to as, “a bond wrapped in real estate." Net lease investments are stable, predictable and have very little risk.

A single-tenant, net lease property is typically described as a free-standing office, industrial or retail building that is leased and occupied by one user or one company. Ideally, the tenant has committed to a long-term lease of 10 years or more with increasing rent over the lease term. The single-tenant occupier is responsible for paying rent plus some or all of the operating expenses of the building such as taxes, insurance premiums, repairs and utilities.

What Is A Triple Net Lease?

In order to appreciate a net lease one must have an understanding of a full service lease. With a full service lease, the landlord or owner is responsible for all maintenance related to the building. For example, the plumbing breaks or the roof develops a leak, the owner must pay for the repairs in a full service lease.

The tenant with a net lease is responsible for paying rent as well as some of the
operating expenses of the property, i.e. taxes and utilities. A tenant with a triple net lease, also known as NNN leases, pays rent plus ALL of the operating expenses. In a NNN lease
the tenant pays the taxes, insurance, maintenance and rent.

What are the benefits of investing in single-tenant, net-leased properties?

There are many benefits to investing in single tenant net leased (“STNL') properties.
STNL properties provide a steady and dependable cash flow because the tenants
sign long term leases. Additionally, the extended nature of the leases make it very unlikely the property will sit vacant when a tenant does not renew. A property would have to be located in a very bad location for a leasing agent not to find a replacement tenant with five
years notice that a lease is expiring.

One of the other major benefits of net leased properties is the security of the initial
investment. For example, when you purchase a net lease property you will get the payments during the lease term and the added benefit of likely appreciation of the property. In part because of their location and long term leases, NNN properties are not subjected to the same risk of depreciation as other commercial properties.

Unlike in the stock market where you are subject to continuous fluctuations, you are assured to get the rental payments from your long term lease and you are more than likely to see your property appreciate in market value. Net lease properties allow you to preserve your investment capital.

Net lease properties are passive investments. A passive investment is one where you get paid and you are not required to do any additional work. In comparison, an active investment requires your time and money. For example, owning anapartment building or even a shopping center requires a lot of work. You have to deal with repairs, lease negotiations, rent collections, and other tenant issues. Many owners are wisely transitioning from multi-family to net lease properties.

Another benefit of net lease properties is that they can be used to build and pass wealth to
future generations. With the assistance of estate planners, an owner can pass on the property and the income associated with it to future generations. By utilizing the benefit of the 1031 exchange an owner can build generational wealth and reinvest gains into new properties that
produce even more income.

What are the risks associated with investing in net-leased properties?

There are very fewrisks related to investing in net-leased properties. One risk is the credit
rating of the tenant. An owner with a tenant with investment grade credit is unlikely to have any issue with receipt of rental payments on time. If the tenant is not an investment grade tenant then it's an entirely different ball game. A non- investment grade tenant could be late in payments or even default entirely. Another risk is in the ability to re-use of the property itself. A
space that has been used as a drug store or dollar store has a wide range of
potential new uses. A property that has been used as a fast food restaurant or an auto repair shop will not have as many potential new uses.

Compare single-tenant net-leased investments to multi-tenant investments?

Multi-tenant buildings have more than one tenant, and as a result, owners and landlords must juggle multiple leases that begin and end at different times. These leases are rarely longer than seven years. That means that the building's financial performance is vulnerable to the ups and downs of the market.

Many net-lease investors have previously owned other types of real estate but are
looking for an investment that requires less maintenance and supervision. For example, many owners of apartment buildings end up selling their high-maintenance properties and then reinvesting the sale proceeds in single-tenant, net-leased retail properties, as do many land owners who have previously never received any income or tax benefits from their property.

What are the major factors to consider when investing in NNN properties?

Single tenant triple net properties are some of the most reliable forms of income- producing real estate ownership. There are four major factors that should be examined when evaluating
a NNN property:

1) The location;

2) The property;

3) The tenant; and

4) The lease.

1) Location, location, location still reigns supreme as the primary consideration in real estate investing. Is the property in the city or the suburbs, what city is it located in? Is it on a prime corner or a highly trafficked street? The right location includes the concepts of "replace-ability" and tenant demand. Often, triple-net investors ignore the importance of location, relying most heavily on the strength of the primary tenant to offset a weaker location. While location
risk can be diminished by a strong, national tenant, the better investment choice includes a strong tenant in a strong location. The cost of the asset often will be higher for the better location, but the ability to replace a tenant in a location that provides greater demand can provide irreplaceable downside protection.

2) The Property: The right property includes the right type and condition of the
asset as well as the price paid for the asset. Cost and condition are interdependent in real estate. An asset in poor or fair condition may make a great purchase at a severely discounted
price, whereas the best real estate location in the world may make a bad purchase if the buyer pays too much. The major consideration as it relates to the right type of asset is the ability to place a new tenants in the space in case a lease is not renewed.

A property uniquely customized to one particular tenant can be very difficult to fill in the event that the original tenant defaults or does not renew their lease. For example it is much easier to find a replacement tenant for a building that has housed retail clothing or
goods than one that has been built out to serve as a Jiffy Lube.

3)Tenant: Who is a good tenant? The best tenants are national companies with little or no debt and investment grade credit ratings. When looking for the right tenant, an investor must be careful to distinguish between corporate and franchise-backed leases. There is a big difference between the security provided by a national corporation when compared to an individual franchisee. The NNN property market is diverse and provides a broad array of tenant options for a client to customize their investment portfolio.

4)The Lease: Information pertaining to selecting the right lease is provided ingreater detail in the chapter Leasing 101. The bottom line is that the best leases requires a lease term long enough to provide stability, has regularly scheduled rent increases ("lease bumps"), and is free from unfair early termination clauses.

These are the major factors to be considered when searching for an acquisition. There are numerous types of NNN properties that an investor may choose from.

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