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3 Things You Might Not Have Known About a Triple Net Lease

Posted on by Jonathan Aceves

For investors looking for a long-term steady source of income with minimal risk, a triple net lease offers a promising prospect. Unlike double net leases, which require tenants to pay some degree of the rented property’s maintenance costs, real estate taxes, fees, and property insurance, a triple net lease requires the tenant to pay all of those costs, in addition to rent and utility bills.

Without a net lease contract, the landlord (or investor) would typically pay for the building’s insurance, taxes, maintenance costs, and any other fees while renting to tenants, so a triple net lease, also known as a “triple N”, typically benefits real estate investors.

But when considering whether to draft up a triple net lease agreement, there are some important considerations to keep in mind. In this article, we will take a look at three things you might not have known about a triple net lease.

1. You Need A Portfolio of Properties

To invest in a triple net lease agreement, you will typically need to lease at least three commercial properties, and preferably more. Ideally, you will want a single tenant to rent all of the commercial properties in your portfolio, such as office buildings, parks, shopping centers, restaurant chains, pharmacies, or banks.

Since you are investing in high quality properties with all the upkeep and fees taken care of, you can enter the agreement without fear of losing your investment. Particularly given that the normal term for a triple net lease agreement runs from about ten to fifteen years, with a steady rent appreciation throughout that time. So, you are pretty much guaranteed a return on your investments at minimum.

You do, however, need to have a minimum accreditation of at least $1 million. And this net worth accreditation does not include the value of $200,000 in income, or a primary residence. Interested investors without access to sufficient investment offerings can invest in a real estate investment trust, or REIT, that pairs smaller investors with other partner investors.

2. The Issues of Taxes

For investors whose properties are sold, it is possible to simply transfer the initial capital into a new triple N lease agreement without paying additional taxes. This is called a 1031 tax-deferred exchange, and allows the landlord to continue their holdings almost uninterrupted.

On the flip side, however, triple net lease agreement holders have been deemed passive investors by the IRS, which means that they are not considered to be an active business or trade. As a result, landlords with a triple net lease agreement may not be eligible for the 20% tax deduction that most landlords count as a benefit. Even if a landlord with triple net lease agreements puts in significant work to oversee the tenant’s financial responsibilities (property taxes, building insurance, and regular maintenance), and takes on some level of economic risk in signing this agreement, they are still considered passive investors, and thus may need to renegotiate their contractual terms if they want to be eligible for increased tax deductions- or find a way to record and prove that they put in at least 250 hours each year of active engagement.

For tenants, one drawback of entering into this type of lease agreement is assuming the burden of paying property taxes. If a community raises the tax rate annually, or raises appraisals on commercial properties, then the tenant may not have recourse to contest the higher tax prices. For this they would have to rely on the landlord, who may be less willing to spend time and money conducting a private appraisal to fight the higher appraisal. This is to the detriment of the tenant, who is left footing a higher bill.

If a landlord adopts this fully hands off approach to investing, however, it may backfire on them in the end. If the lease expires and the tenant chooses to move somewhere with lower taxes, then the investor will suddenly assume all responsibility for the property’s fees, including the higher taxes, while searching for a new replacement tenant. And if the property has higher prices than other similar ones, it may be difficult to find a tenant willing to pay more on a regular basis for a similar building.

3. Tenants Can Benefit Too

A triple net lease agreement places all the responsibility for the property on the tenant, from a broken pipe to ensuring that the property’s Wi-fi is up to speed. So, it may seem like it only benefits the investors who own the building. In fact, however, this is not the case. Since tenants bear all the responsibility for the property, they also benefit from having more freedom with the building. They can change and re-arrange the interior and exterior of the building to fit with the needs and aesthetics of their brand. That way, tenants representing specific companies can keep a consistent appearance across all the properties they manage. This is a huge benefit, particularly for tenants who may not have a sufficient amount of capital to invest in their own property purchases.

In addition, triple net leases are generally more flexible, allowing the tenant to take full charge of the property without the landlord overseeing daily operations, but with the reassurance that there will be a limit on tax and insurance increases during the course of the agreement. Since the tenant is absorbing the risk of the investor’s overhead fees, they can often negotiate for a lower base rental fee amount that works better for them.

A Sound Investment

Despite the possible risks, a triple net lease agreement is a widely favored interaction between tenants and landlords that utilizes the landlord’s investment capabilities combined with the tenant’s on-site assistance, regular maintenance, and payment of fees. For commercial real estate investors, drawing up a triple net lease agreement is a smart approach to investing in commercial real estate with minimal risks and a slow, gradual, long term appreciation of the initial investment capital.

 

Why 3D Virtual and Video Tours are Critical in Marketing Commercial Real Estate Right Now

Posted on by Jonathan Aceves

In the post-pandemic world, ensuring that your commercial property can be toured and understood remotely is essential for it to compete in the marketplace.  Due to the Pandemic, tenants are increasingly wary of letting strangers walk through their buildings–this is especially true for multifamily and office. 3d and virtual tours are the best way to accomplish that, and we’ll discuss reasons why and the different kinds of tours in this article.

Reasons for the increasing popularity of 3d Virtual tours:

  • Social Distancing Requirements
    • Showings are more complicated now than ever—many buyers are hesitant to view space, and many tenants do not want strangers in their buildings.
    • During this time, commercial properties with 3d virtual tours will stand out against their competitors.
  • 3d Tours create More traffic
  • 3d tours Help tell the story of the property
    • 3d tours create virtual spaces that a buyer or tenant can use to understand the layout and feel of a property.  They help convey the visual information that can be difficult to explain in text or in still photos.
    • Some 3d tours also create floorplans or “Dollhouses” that help make it easy for a prospect to visualize the space.
  • 3d Tours help with Out of Town Buyers/Tenants
    • Prospects are often looking at many options from far away, and you have just a few moments to capture their attention. A 3d Tour makes it easy for them to understand.
    • “Decision makers aren’t always able to tour every property, 3d tours give them a feel for the space and ensures that your building is in consideration.” Peter McGuone, CBRE, SVP

What different types of tours are there?

  •  3d Virtual Tours–these are rendered and allow you to virtually walk through a property.  Matterport is a good example of this sort.
    • With 3d Virtual Tours, lots of scans are processed to create a rendering of the space.  These are the most immersive, giving a user the ability to tour the space.  These are also some of the most challenging to create.  For an example see this video.  
    • Also, for an overview of all the major providers of Virtual Tour Software, see Ben Claremont’s video on the subject.
  • Virtual Tour–think Zillow’s tour feature.  These tours are not rendered, so they are more like a collection of 3d pictures, that are labelled.
    • You can still click on “Living Room” or “Foyer” and look around the different 360 pics, but you cannot virtually walk through the building.  On some platforms, you can click on an adjacent picture, and it will take you there, but it is not as smooth as a 3d Virtual Tour.
  • Video Tour–This is…well, a video tour.  They can be guided or unguided.
    • Guided – These are useful and often can be a great supplement to a 3d virtual tour.  The guide can walk through the space, describing the features and benefits of the space,
    • Unguided – Think of a video camera being taken through a property–Zillow has a video tour feature and most of the videos placed there are unguided video walkthroughs.

We would love to hear your experience with 3d Virtual Tours.  As a Broker–do you currently use them, and have they been helpful?  As an Owner–how important is it to you to have 3d tours on your listings?

This post originally appeared in Jonathan Aceves’s blog and is republished with permission. 

The Basics of Historic Tax Credits

Posted on by Jonathan Aceves

What are historic tax Credits?  Historic Rehabilitation Tax Credits are available for developers who renovate historic buildings.  These include federal and state historic tax credits.  The federal tax credit is 20% of the qualified expenses over 5 years.  Most states (GA and SC included) have 25% tax credits, often with a cap.  Georgia’s tax credit is capped at $300,000 for the time being, and South Carolina’s is capped at 1,000,000. 

Which buildings qualify for this credit?  Buildings located in historic districts or individually listed in the national register of historic places qualify, also buildings deemed by the state historic preservation office to be historically significant. 

Historic Tax credits are incredibly complex instruments.  They can be used to make historic renovation projects feasible that otherwise would not make financial sense.  They can be coupled with other programs such as the opportunity zone program or enterprise zone programs.  This article will cover some of the basics and provide links to helpful resources. 

What are financial guidelines?  First, you must spend more than the adjusted basis in your renovation.  Make sure to talk with a tax professional to help you organize this calculation, but basically you must spend an amount greater than what the building is worth. Second, only certain expenses are eligible for the credit—these are “qualified rehabilitation expenditures” (QREs).  QREs include construction costs, taxes, consulting expenses, architectural costs, among others.  Generally, additions to the building do not quality, as well as furnishings, commissions, and appliances.   

Are there guidelines for the renovation?   Yes.  The secretary of the interior has guidelines for the renovation they’d like applicants to follow, repairing rather than replacing historic elements, preserving distinctive finishes and features, and maintaining the historic character of the building.  You can see their 10 principles here. 

Is there a requirement to hold the property for a certain amount of time?  Yes.  You must hold the property for 5 years. 

Who can use historic tax credits?  In many cases, application of the Federal tax credit is limited to passive income for taxpayers with adjusted gross income above $250,000.  Real estate professionals, short-term rental operators, and C-corps are exempted from this rule.  See questions 35-37 here.  

How do you apply?  We generally recommend that an applicant work with a consultant and an accountant to help them with the applications.  Reach out to us and we can connect you with expert consultants. 

We’d love to learn from you and hear your feedback!  Have you ever participated in a historic tax credit project?  Have you evaluated a historic renovation? 

This post originally appeared in Jonathan Aceves’s blog and is republished with permission. 

The Four Primary Uses of Sale-Leasebacks

Posted on by Jonathan Aceves

The Four Primary Uses for Sale-Leasebacks

All business owners should be familiar with the Sale-Leaseback as a tool for raising capital and potential exit strategy. As opposed to bank financing, the Sale-Leaseback can have some advantages, and today we will explore the four different ways they can be used by a business owner.

  1. Financing: Allows for off-balance sheet financing (100% of equity can be made available for investment, as opposed to 75% with traditional financing) and at a lower cost
  2. Improved Returns: Firms may earn a higher return on their primary business rather than in real estate, so they consider moving capital to principal business to expand operations
  3. Balance Sheet Improvements: Tool for improving the balance sheet which can be important for exit planning and larger corporations
  4. Exit/Repositioning: When a firm determines they want to exit a given market/location, they can execute SLB to cash out of a given asset in advance, and then have 5-10 years to find new location.

Financing

Sale-leasebacks are a popular means for companies to fuel growth by moving capital out of real estate and into their principal business.  Often, releasing capital in real estate is more affordable and has better terms than bank financing.  With bank financing, you may only be able to release 75-80% of the equity in your real estate, and that loan will likely come with a 3-year balloon payment.  And often the appraised value of the building is the value of the vacant building.  With a Sale-leaseback, a business owner can tap into 100% of the equity in the real estate, with no balloon payment, and often the value of the NNN lease to an investor is higher than the appraised value of the empty building (depending on the owner’s creditworthiness and balance sheet).  Also, a risk of bank financing is that if the appraised value falls below the agreed-upon LTV, the loan is in default and immediately called (think 2008).  The sale-leaseback puts the market risk on the new owner.

Improved Returns

If the returns from a company’s principal business are higher than the returns on the real estate, it often makes sense to move equity out of real estate and invest it in the company’s core business.  The goal is always to maximize return.  For example, if the business is able to gain a 20% return from day-to-day operations, and the ownership of the real estate where the business resides is only netting an 8% return, returns would increase if the business could divest of the real estate to allow for greater investment in the core business.  Through the signing of a long-term lease, the real estate can be sold, the business remains in operation in its current location, and operations could conceivably be expanded with the opening of a new location or other operational expansion. 

Balance Sheet Improvements

As a seller looks to exit their business, it can become important to improve financial statements.  With this strategy, the seller replaces a fixed asset with a current asset. This increases the current ratio (current assets/current liabilities).  Sometimes referred to as the Working Capital Ratio, investors see this as an indication a company’s ability to service its short-term debt. 

Exit/Repositioning

A Sale-leaseback can be a useful tool for a business that knows it wants to move from a given location into another market or trade area in the future.  It can also be a means to exit from an overly specialized or obsolete building.  An example could be a prison or a hospital, or a retailer realizing that growth is moving in a given direction and determining that in 10 years it will move to follow growth, or that they will centralize their operations in a new building. 

We’d love to learn from your experience! Have you ever considered a Sale-Leaseback? As a broker, have you ever put one together? What have mistakes have you made/lessons learned?

This post originally appeared on Jonathan Aceves’ Blog and is republished with permission.

The Four Primary Uses of Sale-Leasebacks

Posted on by Jonathan Aceves

The Four Primary Uses for Sale-Leasebacks

  1. Financing: Allows for off-balance sheet financing (100% of equity can be made available for investment, as opposed to 75% with traditional financing) and at a lower cost
  2. Improved Returns: Firms may earn a higher return on their primary business rather than in real estate, so they consider moving capital to principal business to expand operations
  3. Balance Sheet Improvements: Tool for improving the balance sheet which can be important for exit planning and larger corporations
  4. Exit/Repositioning: When a firm determines they want to exit a given market/location, they can execute SLB to cash out of a given asset in advance, and then have 5-10 years to find new location.

Financing

Sale-leasebacks are a popular means for companies to fuel growth by moving capital out of real estate and into their principal business.  Often, releasing capital in real estate is more affordable and has better terms than bank financing.  With bank financing, you may only be able to release 75-80% of the equity in your real estate, and that loan will likely come with a 3-year balloon payment.  And often the appraised value of the building is the value of the vacant building.  With a Sale-leaseback, a business owner can tap into 100% of the equity in the real estate, with no balloon payment, and often the value of the NNN lease to an investor is higher than the appraised value of the empty building (depending on the owner’s creditworthiness and balance sheet).  Also, a risk of bank financing is that if the appraised value falls below the agreed-upon LTV, the loan is in default and immediately called (think 2008).  The sale-leaseback puts the market risk on the new owner.

Improved Returns

If the returns from a company’s principal business are higher than the returns on the real estate, it often makes sense to move equity out of real estate and invest it in the company’s core business.  The goal is always to maximize return.  For example, if the business is able to gain a 20% return from day-to-day operations, and the ownership of the real estate where the business resides is only netting an 8% return, returns would increase if the business could divest of the real estate to allow for greater investment in the core business.  Through the signing of a long-term lease, the real estate can be sold, the business remains in operation in its current location, and operations could conceivably be expanded with the opening of a new location or other operational expansion. 

Balance Sheet Improvements

As a seller looks to exit their business, it can become important to improve financial statements.  With this strategy, the seller replaces a fixed asset with a current asset. This increases the current ratio (current assets/current liabilities).  Sometimes referred to as the Working Capital Ratio, investors see this as an indication a company’s ability to service its short-term debt. 

Exit/Repositioning

A Sale-leaseback can be a useful tool for a business that knows it wants to move from a given location into another market or trade area in the future.  It can also be a means to exit from an overly specialized or obsolete building.  An example could be a prison or a hospital, or a retailer realizing that growth is moving in a given direction and determining that in 10 years it will move to follow growth, or that they will centralize their operations in a new building. 

 

Development Authority negotiates Greenjackets Stadium Lease

Posted on by Jonathan Aceves

The former home of the Augusta Greenjackets is getting a second life. Last week Augusta leaders agreed on a deal to bring more entertainment to the Augusta area. A 10-year master lease agreement to bring big acts and events to the Lake Olmstead Stadium will have us seeing the area around Lake Olmstead transformed starting this April. The Augusta Commission voted and approved for the Augusta Development Authority’s “stadium master lease” of the facilities. C4 Live, the subtenant, will be spending hundreds of thousands of dollars to make upgrades to the structure and in addition to Masters Week, we can expect other entertainment events through out the year. This is great news for Augusta and this piece of land getting a second life!

What’s a master lease, you may ask?  Here’s Bigger Pocket’s summary, but in short, it’s when an owner leases a space to a tenant who then has the right to sublease to another tenant.  The city of Augusta will lease to the EDA, who in turn will lease to C4 Live.  This is generally good when the landlord trusts the master tenant, but has no relationship to the subtenant–the master tenant is guaranteeing the performance of the lease.  

Huge Economic Impact of Topgolf and Dave & Busters for Augusta

Posted on by Jonathan Aceves

 

What are the economic implications of Topgolf and Dave & Buster’s coming to Village at Riverwatch?  According to projections from Augusta Economic Development Authority reported by Damon Cline, these two projects are expected to add $15 million to the local tax base, and add 200 jobs and generate $1M in sales tax revenue.  Hats off to the Economic Development Authority, who was able to help attract these developments without tax incentives, and the only expense is a $250K commitment  to construct the public road that will give these sites access.  

 

What do you think will be the impact of these new developments?  Comment below:

 

Additional Resources:

More Details in Great Article by Damon Cline on this Subject

Village @ Riverwatch website & contact for Jordan Trotter Real Estate who handles leasing

Topgolf Website

Dave & Buster’s Website

 

 

How Opportunity Zones are Being Used by Startups

Posted on by powerserve

Opportunity Zones are a new tax investment vehicle similar to a 1031 Exchange that allows tax deferment on acquisition of real estate and also on investments in businesses.  This opens the door for small startups to raise funds for their ventures.  Remember that all of Downtown Augusta, Downtown Aiken, and many other city centers in the CSRA are designated as O zones.  

 

See the Forbes Article below for details on how Opportunity Alabama is doing this, as well as an article in Medium by Alex Flachsbart–Founder & CEO of Opportunity Alabama.  Also see Enterprise’s overview of OZone program. 

 

Forbes Article: https://www.forbes.com/sites/cognitiveworld/2019/08/07/opportunity-zones-ai/#2a445e2b6a14

 

Medium Article: https://medium.com/@info_24727/putting-the-opportunity-back-in-alabama-ef305a8b26a

 

Enterprise overview of O-Zones: https://www.enterprisecommunity.org/resources/policy-focus-opportunity-zone-program

 

#opportunityzone #downtownaugusta #cre #investaugusta #multifamily

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