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Absolute Net
Absolute Net Lease Investment Property
Absolute Net or NNN lease investment properties are commercial properties that have tenants in place with existing leases that require the tenant to pay for taxes, insurance, operating costs and maintenance. In other words, zero landlord responsibility!
These properties are excellent vehicles for 1031 tax deferred exchanges, investors looking to diversify their portfolio as well as the investor that wants a monthly income stream while maintaining or increasing their initial investment.
Land for NNN Brochure.
So How Does It work?
As an example lets look at how a 1031 Tax Deferred Exchange would work. The Seller had a 2.5-acre parcel on Las Vegas Blvd which sold for $2,500,000. They utilize a 1031 Tax Deferred Exchange placing $1,825,000 of the proceeds into the exchange account to defer capital gains tax while collecting the remaining $675,000 and paying the capital gains on that portion (boot). The $1,825,000 will be used for the purchase of a new investment (cost of the replacement property and closing costs including inspections) The replacement property is a 1-acre parcel of land with a QSR, (quick serve restaurant), commercial building on-site being operated by a Sonic franchisee with 9 years left on a 15-year absolute net lease, (zero owner responsibilities) with rent increases of 7% every 5 years. The agreed upon purchase price for the replacement property is $1,800,000. The annual lease amount is $112,136 ($9,345/month) or a return of 6.23%, (6.23% Cap rate).
In 2028, (5 years into the original lease agreement), the annual lease amount will increase to $119,986 (7% increase) creating a Cap rate of 6.67%, which will last until the expiration of the original lease at which point the tenant has three 5-year option periods to renew with an increase of 7% for each renewal.
The Seller can sell the replacement property at any point during the lease period or during the extension period, but for this example, the Seller plans to liquidate the property 10 years after its acquisition. At that point the Seller will have collected $1,048,474 from the lease and will sell the property for the same Cap rate they purchased it for, 6.23%, or $2,060,754, (year 1 of extension 1’s annual rent is $128,385), creating a gross profit from the exchange of $235,754, (liquidations sales price of $2,060,754 less $1,800,000 original purchase price plus $25,000 closing costs).
The Seller took a $2.5 million dollar asset that was providing no monthly return, cashed out $675,000 and purchased a new investment for $1.8 million that provided a monthly stream of income totaling $1,048,474 over 10 years while increasing the exchange investment to $2,060,754, giving the Seller a total gross return of $1,284,228 or 71.35% over a 10-year period.
The Seller could choose not to liquidate the asset at year 10 and hold the property for the entirety of the option periods, could sell earlier and could choose to move the investment into another 1031 tax deferred exchange for a different property.
This scenario will also work for anyone that has investment capital that is looking for a regular monthly return, and in many cases can include financing to complete the purchase, but debt service would have to be debited from the returns.
WANT MORE INFORMATION ABOUT ABSOLUTE NET PROPERTIES IN GENERAL , OR ANY OF THE PROPERTIES FEATURED IN THE ABSOLUTE NET PROPERITES LINK?
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