If you are thinking about investing your Real Estate IRA funds in commercial properties, you should understand the ‘triple-net’ lease concept, or as it’s sometime called, “NNN leasing.”
Occasionally, companies with some pretty slick tax planners decide they don’t want to own the properties they occupy outright. They estimate that their company can get better cash flow by leasing the property and deducting the entire cost of the lease, plus all other costs, as business expenses. This doesn’t make as much sense from a real estate investor’s point of view, but it may well make sense for a high-growth company, because they believe they can get a better return on investment on that cash by reinvesting it in their own company than they can in real estate. This creates an opportunity for the Real Estate IRA investor: The tenant may be willing to sign a ‘triple net’ lease that takes on nearly total responsibility for the building. They will pay the costs of repairs and even capital improvements necessary to enable their operations – especially with newer buildings.
A true triple net lease is pretty close to a hands-off, turnkey investment from the point of view of the property owner. It requires little or nothing in the way of property management, other than in seeing that the tenant is taking reasonable care of the property and paying rent on time, while obeying relevant laws and avoiding anything that could create a liability for you as the landlord – such as committing pollution or other environmental violations.
That said, total, complete NNN leases are rare, and in practice, most agreements leave at least some responsibility with the landlord.
A triple net commercial lease should provide you with reliable cash flow from your Real Estate IRA investment, with little risk of having to spend large sums of money for repairs on short notice. A NNN lease generally makes those the responsibility of the tenant, though you will likely have to accept a lower rent rate as compensation for the tenant taking on that added risk.
These leases tend to be for fairly long-terms, so they may be a good way to lock in an income stream for a number of years from your Real Estate IRA.
Real Estate IRA investors who enter NNN leases should understand that most of these agreements will be single tenants. It’s not like owning a strip mall where you have as many as a dozen or two dozen different businesses paying rent. Most tenants in triple-net lease situations won’t want other tenants in the building muddying up the picture. So you’ll have one single tenant in the building. So you’ll need to be very careful in assessing the credit risk of the tenant. If they go bust, you may wind up with a big building that’s already been remodeled to suit the old tenant, and you may have to invest money of your own in remodeling to suit a new tenant coming in before you can get a lease signed.
So be sure to pull up a business credit report (from Dun & Bradstreet or Equifax, for example), and do some careful due diligence of your own, before entering into one of these arrangements.
They aren’t risk free, but for an income-focused investor who wants to minimize the likelihood of cash flow shocks from unexpected repairs, they can be an excellent fit.