Net Lease Properties are the traditional real estate investment with no management obligation for the owner. In their purest form (called a triple net lease or NNN lease) the tenant manages the property, pays the taxes and insurance, and takes care of all repairs and maintenance. The only obligation of the owner is to pay any debt service (mortgage) from the rent check.

Most net lease properties involve long term tenant leases (typically 15 to 25 years with 5 year options after that) with a defined rental rate with increases (called "bumps"). A NNN investment can provide steady income regardless of the condition of the economy or local real estate market. The three major keys to successful net lease investments are good demographics, long term leases and a creditworthy tenant.

The following are variations on Net Lease investments:

Bond Leases

Commonly called a "hell or high water" lease. Under this type of lease the tenant is obligated to continue paying rent no matter what occurs with the leased property. A Bonded Lease is a form of an absolute triple net lease where the tenant agrees to pay a monthly lump sum base rent as well as the property taxes, the property insurance, and the maintenance. What makes the bonded lease different from the absolute triple net lease is that there are no legal defenses for the tenant not honoring their obligations under the terms of the lease.

Absolute Triple Net (NNN Lease)

The tenant is responsible for all operating expenses including maintenance, repairs, and replacement for the entire property, without limitation. This is the type of lease that most investors expect when purchasing a triple net lease. There are few legal defenses for the NNN tenant not paying their rent and related expenses. An example of a possible defense for the tenant not to have to fulfill their NNN lease obligation would be if the property were to become subject to eminent domain proceedings.

Double Net Lease (NN)

The double net lease typically requires some level of owner responsibility for the property. Traditionally in a double net lease the owner is responsible for the structural components of the building such as the roof, bearing walls and foundation.

Modified Net (aka Modified Gross)

In this arrangement, the tenant pays their own utilities, interior maintenance, repairs, and insurance. The owner pays for everything else, including real estate property taxes.

Triple Net Synthetic

Tenant-in-Common (TIC) investments provide the real estate investor with the advantages of a triple net lease; someone else manages the property. Frequently TIC investments offer ownership in large institutional quality properties, with either single or multi-tenants, appreciation, cash flow and annual depreciation benefits. In addition to the net leased advantages, the lower initial investment required by TICs provides an opportunity for the investor to achieve greater diversification with their investment dollars.

While there are a number of factors to consider when looking at net leased properties, special attention to the three areas below will provide the investor a good sense of the suitability of a given property.

Credit Worthiness of the Tenant

"Credit" tenants have investment-grade credit rating from a nationally recognized rating service and are considered the most desirable. Credit tenants will provide greater security and typically lower returns than non credit tenants. Investors looking for higher returns frequently invest in properties with regional and local tenants. These tenants need to be carefully investigated to make sure that the investor fully understands the added risk and whether or not they are being compensated for taking that risk. There are a number of sources for information regarding public companies including www.zacks.com and www.freeedgar.com.

Lease Terms

Lease terms should be carefully considered. Look at: length of lease, options, kinds and frequency of bumps or increases, termination clauses and any expenses that the investor/property owner could ultimately be liable for.

Demographics

Location, location, location. While net lease properties provide steady and predictable income for the term of the lease, the location of the property will impact the long term value of the investment. All leases end, and when they do, the ability to negotiate favorable new lease terms with the existing tenant or to retenant the property will be a direct function of the strength of the property's location.

Please consult your CPA or tax attorney for assistance in determining the appropriateness of Net Lease or other investments for your particular needs.

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