By Chay Lapin – Senior Vice President Kay Properties and Investments
Please find below a case study when considering purchasing NNN properties versus alternative options such as DSTs. Is a NNN Property the way to go for my 1031 exchange? Are you considering to purchase and manage a (NNN) Net Lease Property on your own?
Important Questions to Ask
1. Are you prepared for the potential active management? NNN properties are only passive if everything goes well. What happens if they do not?
If a NNN Property goes dark (tenant moves out) or bankrupt, are you ready to search for a new tenant, negotiate a new lease, negotiate with tenants and lenders, pay lawyers, manage leasing agents, higher contractors to renovate, etc. We have had clients 1031 exchanging out of their NNN properties because their NNN broker communicated half truths about NNN being a turn key option. NNN’s are great, until they’re not. Investors are exchanging out of NNN nightmare situations that a NNN broker didn’t walk them through the potential downfalls of NNN properties all too often…
2. Are you willing to take a multimillion-dollar company to court?
We have seen large companies bully their way out of a lease agreement because the landlords/building owners are too small to afford a costly litigation. Therefore the owner has been left with tens of thousands of dollars in maintenance costs or unpaid/reduced rent. Not only does this negatively impact your potential cash flow, it also impacts the overall value of the building and your family’s financial security. Many NNN investor clients that we worked with that were told by their NNN broker they were buying a “safe” property have found themselves with properties valued at significantly lower values and lesser returns. Although corporate tenants can do this to anyone… This is more difficult for these companies to do when the landlord is represented by a real estate equity firm with hundreds of millions or billions of dollars of real estate under management which is why the DST may be a fit for investors afraid of these scenarios.
3. Are you prepared to do your own comprehensive due diligence required to purchase a NNN property that is such a large component of your wealth?
On all our DST properties, we conduct/review lease audits, environmental reports, insurance audits, building inspections, economic/demographic surveys, and we send someone to conduct onsite inspections. This can be a very costly and a time consuming process that many NNN buyers don’t have the time or experience to do themselves. Has your broker done that for you or are you prepared to do this on your own?
4. Do you feel comfortable with all your eggs in a single NNN basket
Putting a large component of one’s wealth into a single NNN asset is simply not wise. Why would one invest in a single NNN property, when you can get access to the similar type of NNN properties but in a diversified* strategy whereby you don’t have all of your eggs in one basket? **
5. One of the greatest questions 1031 clients ask themselves, “what kind of legacy will I leave my family when I am gone?”
Are your wife or heirs able to take on any of the above situations if you are not around to manage these issues? Selling a property years into the lease can result in pennies on the dollar, especially if there are issues and they will be left to negotiate lease terms with a large fortune 500 company. Many NNN investor clients that we worked with choose DST investments since the sponsor company will be handling these items and not their wife/heirs who may not have the real estate experience to properly asset manage a NNN property. *These examples are the experiences of a few of our clients and may not represent the experiences of others. Past performance does not guarantee or indicate the likelihood of future results.
Using (DST) properties as opposed to NNN properties for your exchange:
• Diversification – Don’t put all your eggs into one basket!
• You can often close on a DST in 2-3 days – helps to potentially reduce 1031 exchange closing risk.
• Non-recourse financing with DSTs as opposed to partial and full recourse with NNN properties.
• Back up – Use a DST as a backup ID in case your NNN deal falls apart.
• DST as a home for leftover funds to cover your exchange and avoid boot. • Professional asset and property management in place.
Access to Quality Real Estate
Often times, 1031 investors are selling a property that comprises a substantial amount of their net worth. DST 1031 properties provide access to real estate that is often otherwise outside of an individual investor’s price point. With the typical minimum investment of $100,000, investors are still able to purchase an ownership interest in large $20 million-plus apartment communities, $5 million-plus pharmacies or $15 million grocery stores, for example. This allows investors access to a level of real estate that they just would not have been able to exchange into before. That being said, we also have had many clients with very large 1031 exchanges opt to invest in multiple DST 1031 properties/offerings because they did not want to place “all their eggs into one basket” by purchasing one single, large NNN investment property. For a list of current DST offerings available at Kay Properties please visit www.kpi1031.com or call 1-(855) 899-4597.*Diversification does not guarantee profits or protect against losses.