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Triple Net Leases – an investment opportunity requiring careful attention to detail and planning

August 13, 2014 by Daniel S. Gonzales Leave a Comment

investment opportunityIn this era of depressed yields from bank deposits, many investors have flocked to purchasing properties subject to “triple net” leases. Such leases require the tenant to be solely responsible for all expenses of taxes, insurance, and repairs and maintenance that might be incurred during the lease term.

Investors who choose to take an assignment of a triple net lease at the closing of their property purchase capture the full future rental stream during the remaining lease term. Typically, these triple net lease assets are sold based on the creditworthiness of the tenant: the lower the risk of bankruptcy, the lower the capitalized annual rate (cap rate), and the higher the purchase price of the asset. http://tinyurl.com/khcwoyx

Generally, triple net leases have cap rates between 4% and 10%, which means that a $1 million investment could earn between 4% and 10% in income per year, an attractive yield when banks are paying interest of 1% or 2%, if that.

When judging the suitability of a triple net lease property, investors should remember that its income bonanza comes with a few unpredictable risks:

  • Changing interest rates: If the investor borrows all or part of the purchase price and then refinances, there is a risk that the NEW interest rate on the loan will be higher than the cap rate of the lease, which would result in negative cash flow.
  • Bankruptcy: Even the most solid firm can go bankrupt. The upheavals in 2008 taught us that, if nothing else. Changes in technology (streaming video vs. video rentals) or consumer taste can adversely affect the best-run companies and lead to loss of revenue or even bankruptcy.
  • Termination expenses: Typically, triple net leases can, with renewals, last a long time. (Walgreens leases can typically have a lease term, with options, of up to 75 years!) But when the lease does end (or is not extended), there will be costs associated with finding a new tenant and readying the building for occupancy as well as paying commissions. It is important to plan for all eventual expenses.

Filed Under: investment opportunities, leases

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Helping you avoid risk, maximize profit, and protect your long term real estate appreciation

Mr. Gonzales is in private practice, providing representation, advice and counsel in complex real estate, corporate, and business transactions on behalf of public and private institutions, businesses, and individuals.

This material has been prepared by Daniel S. Gonzales for informational purposes only and does not constitute advertising, a solicitation, or legal advice. Neither delivery nor transmission of this material or the information contained herein is intended to create, and receipt thereof does not constitute formation of, an attorney-client relationship. The reader should not rely upon this information for any purpose without seeking legal advice from a licensed attorney. The information contained in this material is provided only as general information and is not promised or guaranteed to be correct or complete. Daniel S. Gonzales expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this material.

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