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In its purest form (called a triple net lease or NNN lease), the tenant is responsible for all property management and repairs – including everything from paying the taxes to sweeping out the driveway to repairing the roof if needed. The only responsibility of the owner is to pay the mortgage on the property.

Lease terms for net lease properties tend to be long term, typically 10 years or more with options to extend. Rate increases are defined and are often based on the CPI or a percentage of the tenant’s sales. Net Lease investments can provide dependable income regardless of economic conditions or local real estate prices. The keys to dependable net lease investments are good area demographics (long term appreciation), lengthy leases and a tenant with strong credit.

There are several versions of Net Lease agreements:

Absolute Triple Net (NNN)

The tenant pays operating expenses such as maintenance, repairs, taxes and replacement for the entire property, without limitation. The owners pays the mortgage only. This is the type of lease that most investors expect when purchasing a triple net lease (NNN lease).

Bond Lease (NNN)

Double Net Lease (NN)

Similar to a triple net lease (NNN lease) but with additional owner responsibilities. The owner is generally liable for the structural components of the building such as the roof, foundation and load-bearing walls.

Modified Gross

Also known as modified gross. Under this arrangement, the tenant pays its own utilities, interior maintenance/repairs, and insurance. All other expenses including mortgage & property taxes., are the owner’s responsibility.

Tenant in Common (TIC)

When the IRS agreed that holding title as a Tenant In Common (TIC) qualifies as a “like kind” 1031 exchange and subsequently allowed TIC investors to defer the payment of capital gains taxes, what some call a “synthetic” triple net lease or a Tenant In Common (TIC) investment was created.

Tenant-in-Common investments are similar to NNN investments in that little management is required of the owner. The (generally) low initial cash outlay required for a TIC purchase allows TIC investors to further diversify their portfolios with “investment grade” properties that might not otherwise be within price range. By using a 1031 exchange, investors can adjust their portfolio to their current needs. Frequently investors who no longer want to be involved in managing their commercial real estate will do a 1031 exchange to Net Lease or Tenant in Common properties to both diversify their commercial real estate holdings (thus reducing risk) and eliminate management responsibility.

As with all investments it is crucial that investors consult with their tax and legal advisors prior to making any commitments.

TM 1031 Exchange writes articles that are published in newspapers throughout the United States. If you would like to receive a free copy of the articles please click here.