The Risks in Purchasing A Triple Net Lease Property and a Potential Solution

By Dwight Kay and the Kay Properties Team

Purchasing a Triple Net Lease Property (NNN) provides many benefits to investors.  They’re usually single tenant retail, medical or industrial properties where the tenant is responsible for the majority of if not all of the expenses including insurance and maintenance costs.  They also provide a potentially steady cash flow to the investor as leases are often 10-15 years in length with multiple renewal options. 

However, just like any investment, there are risks involved. 

Vacancies

Triple Net Lease Properties (NNNs) are typically either fully occupied or totally vacant.  Since they only have one tenant, if the company goes out of business, then you have no rent coming in. That means you’re responsible for any debt service, maintenance, insurance and taxes.  When purchasing a NNN investors must be very cautious when it comes to the tenants business model and industry and the potential for disruption that future changes in technology could bring – think Blockbuster Video and Borders Books.

Lack of Diversification

The problem for many 1031 exchange investors is that they often have only between 500k and 3 million of equity to purchase a NNN property and this equity amount comprises a large portion of the investors net worth.  Oftentimes, the most desirable NNN properties start at a 2 million dollar purchase price.  This can be problematic because the 1031 exchange investor is placing a large amount of his or her net worth into one building, with one tenant and that is in one location.  This often causes investors to over concentrate their net worth into a NNN property and if things don’t go exactly right with the property or tenant, the consequences could be disastrous.

A Potential Solution

Many 1031 exchange investors are opting to instead of purchasing just one NNN property with a large portion of their net worth, to purchase fractional interests in NNN properties to build themselves a diversified real estate portfolio. As an illustrative example, instead of buying just one Walgreens for 4 million dollars, because of lower investment minimums, investors are purchasing 500k in a Walgreens, 500k in a CVS, 500k in a Fresenius, 500k in a FedEx industrial facility, 500k in an Amazon distribution facility, 500k in a Costco, 500k in a Starbucks and 500k in a US Government Leased building.

This diversified real estate portfolio of NNN properties allows investors to potentially mitigate concentration risk and reliance on one tenant and potentially losing their entire principal if that one tenant goes bankrupt. Of course there is still a risk of losing the entire investment, but is will be spread across multiple tenants. Investors are doing this through what is called a Delaware Statutory Trust or DST. The DST has been blessed by the IRS as like kind for the purposes of a 1031 exchange via IRC Revenue Ruling 2004-86. Diversification does not guarantee profits or protect against losses. 

About Kay Properties and www.kpi1031.com 

Kay Properties is a national Delaware Statutory Trust (DST) investment firm. The www.kpi1031.com platform provides access to the marketplace of DSTs from over 25 different sponsor companies, custom DSTs only available to Kay clients, independent advice on DST sponsor companies, full due diligence and vetting on each DST (typically 20-40 DSTs) and a DST secondary market.  Kay Properties team members collectively have over 115 years of real estate experience, are licensed in all 50 states, and have participated in over 15 Billion of DST 1031 investments.

This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please read the entire Memorandum paying special attention to the risk section prior investing.  IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation.  There are material risks associated with investing in real estate securities including illiquidity, vacancies, general market conditions and competition, lack of operating history, interest rate risks, general risks of owning/operating commercial and multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed.

Nothing contained on this website constitutes tax, legal, insurance or investment advice, nor does it constitute a solicitation or an offer to buy or sell any security or other financial instrument. If you are not the intended recipient of this message, any use, dissemination, distribution or copying of this communication is strictly prohibited. If you have received this communication in error, please immediately notify the sender and permanently delete all copies that you may have. Securities offered through Growth Capital Services, member FINRASIPC, Office of Supervisory Jurisdiction located at 582 Market Street, Suite 300, San Francisco, CA 94104.

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