What is a Triple Net Land Lease?
Investing in a Triple Net Lease comes with its own set of unique advantages. Beyond the typical creditworthy national tenants often associated with such properties, investors can also choose to lease land and have their tenant construct a building on it over an extended period of time (typically 20 years or more).
This presents them with the opportunity for continued revenue during that term as well as ownership of any resulting structures when complete – providing them long-term asset value and security not available through other investments today.
Why would a tenant opt for a Triple Net Land Lease?
Tenants may choose a triple net land lease for a variety of reasons. For example, undeveloped property in desirable places may be available if the owner is hesitant to sell. At the same time, they may be disinterested in or incapable of developing the property. The tenant has access to a property in a premium location by opting for a triple net land lease.
Another prevalent rationale is similar to why some firms prefer to undertake a sale-leaseback transaction. Instead of investing in land, the renter might use the money saved to pay off debts or develop the company.
The final point is that corporations get no tax advantages from owning land. It is neither depreciable or deductible for tax reasons. However, lease payments are tax deductible. The ability to deduct monthly rent may dramatically increase their bottom line, making a triple net land lease an attractive alternative for many renters.
Triple Net Land Leases offer a one-of-a-kind opportunity for investors
Most triple net land leases contain a clause that permits the landowner to take control of the building at the conclusion of the term or if the lease is canceled early. Because of this clause, renters have an added incentive to ensure that the lease conditions are followed.
At the same time, the investor’s investment has no management obligations and no expenditures while generating a consistent, dependable income year after year. Regular rent increases are normal throughout the base term and option periods, as with other triple net leases, and help protect the investment from inflation.
Remember, you’re still dealing with creditworthy tenants like McDonald’s and Chick-fil-A, as well as large banks like Bank of America or Chase Bank, which means parent firms guarantee the lease rather than a smaller franchisee.
Triple Net Land Leases are often for 20 to 25 years. Leases are highly important since they may be renewed for up to 40 years.
The investor obtains ownership of the building at the conclusion of the lease and may re-tenant the property. Although the property will almost certainly need to be updated for a new tenant, the investor now owns the building as well as the land, increasing the probability of a greater rent than the investor was previously getting. This may significantly raise the value of the home.
Some essential things to consider
Land leases can provide a number of advantages for investors but notably do not offer an annual depreciation deduction on income tax returns due to the non-depreciable nature of the land. Nonetheless, in certain situations, this may be less significant than one might think – such as when completing a 1031 exchange from agricultural properties held by families for generations that most likely have very low depreciable basis values, and therefore, no step up would occur even with purchase.
Subordinated vs. Unsubordinated
With an unsubordinated land lease structure, the landowner has additional security for potential tenant defaults. In such cases, any lender financing utilized by the tenant would be secured through their building and improvements rather than the land itself; should a default occur, lenders assume responsibility for payments made on behalf of that tenant while they seek a replacement occupant. This is common practice in securing funding toward construction as well as other necessary upgrades or additions to property – providing benefit to both parties involved.
In rare instances, a land lease may be subordinated to the lender. This means that if the tenant defaults on their loan, the landowner’s claim is second priority and potentially at risk of forfeiture should repayment not occur. Such a move can benefit tenants by making it easier for them to obtain financing; however, this form of risky investment only threatens landowners who could lose fiduciary interest in their property due to circumstances out of their control. Subordinated leases are far from common practice among mindful owners, given the risks associated with such an arrangement.
Triple Net Land Lease vs. NNN
Net leases offer businesses the opportunity to rent commercial real estate without absorbing all of the associated costs. Tenants are responsible for paying a base rental fee plus their proportional share of operating expenses, providing an affordable and customizable solution that works in most circumstances. There are four kinds of net leases that may exist in a business property:
Single Net Lease
A single net lease offers tenants the benefit of convenience as they combine their base rental payment with costs associated with an operating expense – such as property taxes. This arrangement simplifies payments and ensures that one party is responsible for those additional charges.
Double Net Lease
With a double net lease, tenants are given the opportunity to make up two of their major operating expense categories in addition to base rent – commonly property taxes and insurance. This type of leasing agreement proactively streamlines your rental experience!
Triple Net Lease
Tenants can rest assured of the convenience of covering a variety of operational costs in one fixed rent payment. This includes base monthly rental fees, as well as property taxes, insurance premiums, and maintenance expenses – keeping you both secure and comfortable throughout your leasing tenure!
Absolute Net lease
Net leases offer numerous advantages to both owners and tenants. For investors, a triple net lease can provide the benefits of real estate investment without requiring involvement in daily property management tasks. Owners benefit from having operational costs passed on to the tenant while relieving them of day-to-day duties related to managing their properties.
Tenants enjoy greater control over how operations and maintenance are handled with this type of agreement, as well as the more competitive base monthly rental rates than what may be available through other commercial leasing options.
The following are the primary distinctions between net leases and land leases:
A net lease is an agreement to rent a specific area within a commercial property, whereas a land lease involves the vacant development of land in exchange for rental money. Both require careful consideration and negotiation as they both have unique financial implications depending on the situation.
When compared, net leases tend to be a relatively short commitment when it comes to the time period, typically 5-10 years. On the contrary, land leases usually involve much longer terms of 25 or more years – even soaring as far up as 99 due to factoring in design and build times for commercial properties before leasing them out.
Financing for commercial real estate with net leases is a straightforward route to take. On the other hand, financing for properties with land leases requires an extra step where property owners must subordinate their interest in the property and grant it to lenders – which most often isn’t desired. This complexity can demand careful analysis of available options before pursuing this type of finance solution.
When entering into a net lease, tenants bear their own operating expenses. Conversely, with land leases, the landlord may take on these costs if set up in gross structure – giving tenants financial relief and peace of mind.
Use of the leased premises
A net lease allows tenants to make use of existing premises for their own business purposes, while a land lease provides an opportunity for creative development and potential income through subleasing. With either choice comes the promise of achieving individual goals in commercial real estate leasing.
A simplistic comparison of a net lease and land leases may not provide the necessary insight to make an informed decision. For that reason, it is essential for investors to thoroughly read both types of contracts in order to fully grasp their distinct nuances and evaluate which approach best aligns with their goals.
What is the role of Net and Land Leases in private equity commercial real estate?
Private equity firms provide investors with access to attractive opportunities in the real estate market. However, they typically focus on net lease properties due to their competitive advantages, such as simplified financing, straightforward management solutions and strong returns for buyers. Investors must carefully evaluate a property’s particular structure within its specific lease terms to ensure it meets the criteria of risk tolerance, return objectives and investment timeline goals.
Land leases are often prized by conservative investors looking to maximize income with low risk. With a long-term stream of reliable, consistent returns that mitigate investment danger, these invaluable real estate investments should not be overlooked – making it an ideal choice for those searching for tranquility in their portfolio.