Net Lease Explained
We’ve already looked at what a triple net property is and what a 1031 Exchange is. But what are the benefits and the drawbacks of using 1031 Exchange proceeds for a single tenant triple net property? Our team of net lease experts including brokers Deuce Harris II, Graham Storey, and Charles Bartscher are here to provide the answers you’re looking for.
Q: What are the benefits of using 1031 Exchange proceeds for a single tenant triple net property?
A: There are a couple of primary benefits in using 1031 Exchange proceeds for a single tenant triple net property. The first and most important is the same for any 1031. The seller can defer capital gains taxes by reinvesting the proceeds from the sale into a property or properties of like kind and equal or greater value.
Another benefit stems from looking at tenants on a spectrum. On one end of the spectrum is a small, local tenant that’s not going to pay any of your liabilities when it comes to ownership. This is a highly risky position. At the other end of the spectrum is a credit or national triple net tenant that is responsible for TICAM, which stands for taxes, insurance, and common area maintenance. This is the least risky investment.
When the seller of a risky property has a profit that can be reinvested as part of a 1031 Exchange in a single national tenant triple net property, we can move them up the spectrum toward being in a less risky situation. They get a higher return or the same return for less risk.
As opposed to focusing entirely on increasing return and trying to make money now, we're also working toward capital preservation. We want to make money, but we also want to make sure our money is safe. In terms of the average investor, the more risk we can take off their plate the better off they are.
Q: What is the downside to using 1031 Exchange proceeds for a single tenant triple net property?
A: The biggest drawback is similar to that of any 1031 Exchange – the tight timeline that is involved. When you pull the trigger to sell your property, your time to locate a replacement is very short. For the most part, you are at the mercy of what happens to be on the market at that time.
If you can’t identify three properties within 45 days, or you can't close in 180 days, you don't get the benefit of a 1031 Exchange and you're going to pay some sort of tax. If you’re looking specifically for a single tenant triple net property, you may be even more limited in finding what you’re looking for in a low supply and high demand market.
That’s where we add so much value. We know the intricacies of 1031 Exchanges, and we are experts in net leases. We can help property owners formulate a plan before they sell, and the clock starts ticking. We can also make use of our network of off-market property owners that may be willing to accept offers but aren’t willing to list just yet.
Because we serve in an advisory role, our job is to educate the property owners that we work with and make sure that they have all of the facts and information they need. That way they can make the best decision for themselves and for their situation.
Ask a Net Lease Question
Our brokers will be answering your questions every month through the Net Lease Explained series. If you have a net lease question, our team wants to hear from you at marketing@westandwoodall.com.