TYPES OF SINGLE TENANT NET LEASES
Under a triple net (NNN) lease arrangement, the Tenant is responsible for taxes, insurance, utilities and all non-structural maintenance. The Landlord is responsible for roof and structural repairs and maintenance.
Under an absolute net lease arrangement, the Tenant is responsible for all expenses associated with the building, including roof and structural maintenance, leaving no expenses to be borne by the landlord.
IRC 1031 EXCHANGE
Section 1031 is a part of of the U.S. Internal Revenue Service Code that allows sellers of real estate to defer capital gains taxes by completing an exchange of “like-kind” properties for investment purposes. Taxes on capital gains are not charged on the sale if the closing funds are used to purchase another property. In this way, the payment of the tax is deferred until the property is eventually sold without re-investment.
For example, if a real estate investor sells a retail building in order to acquire another one, he will not be charged tax on any gains made on the original retail property. When the investor sells the original retail development and purchases another real estate investment, the value used from the original to buy the new one has not changed; all that has changed in the IRS’s standpoint is where the value is being held.
How does it work?
After the sale, the 45-Day Rule for Identification, begins. The taxpayer must either close on, or identify in writing, a potential replacement property within 45 days from the closing of the sale of the original property. The time period is not negotiable and the Internal Revenue Service will not make exceptions. The entire exchange can be disqualified and taxes will be due if timing requirements are not met.
Types of Replacement Properties to Identify:
- Three alternative properties of any market value.
- Any number of properties as long as their aggregate market value at the end of the identification period does not exceed 200% of the market value/price of the relinquished property as of it’s date of sale.
What is Boot?
Most investors follow the 3-property rule so they can complete due diligence and close on the best one(s). The goal is to trade up to avoid the transfer of “boot” and keep the exchange tax-free.
“Boot” is the money or fair market value of any additional property received by the taxpayer through the exchange. Money includes all cash equivalents, debts, liabilities to which the exchanged property is subject. This is “non-like-kind” property and the rules governing it during the exchange are complex. Suffice it to say, without expert advice, receiving “boot” can result in taxes.
1031 Exchanges are Subject to the 180-Day Rule
Once a replacement property is selected, the taxpayer/seller has 180 days from the date the relinquished property was sold to close on the replacement property. Note that a portion of this 180-period has already been used by the 45-day Identification Period. There are no extensions and no exceptions to this timing rule.
Since the law requires that the taxpayer not touch the proceeds from the first transaction, the Qualified Intermediary technically acquires the replacement property from the seller at closing and after the transaction is completed, the Intermediary transfers it to the taxpayer.
HOW COMPANIES ARE RATED
To determine the ability of the tenant to meet its lease obligation, we review recent financial data for the company. When available, the ratings are made by independent research services that analyze the financial strength of the corporation, project future prospects and determine how well the corporation is prepared to cover both interest and principal payments.
The two principal bond rating services are Moody’s Investors Service and Standard & Poor’s. Typically, these companies rate companies on a similar basis although the rating systems are slightly different as shown below:
|General Description||Moody's||Standards & Poor's|
|Poor to Default||Caa||CCC|
|Highly Speculative Default||Ca||CC|