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Sole Ownership Triple Net Lease vs.
Tenants in Common (TIC)
Properties - A comparison
Sole Ownership Triple Net
A Triple Net Lease (NNN) requires the tenant to pay all normal expenses of ownership including insurance, maintenance, and taxes. Generally, lease terms are 10-30 years and include rent increases. Some advantages are:
1. Ownership has no management responsibility.
2. Steady monthly income often secured with a national credit tenant (Walgreens, Home Depot etc.)
3. Typically loans on credit tenant properties are non recourse and offered at better rates than for other types of real estate.
4. Triple net leased properties are frequently in highly desirable locations providing strong future appreciation potential.
Many regional and national companies prefer to lease their business property which permits them to maintain control of their physical environment and allows them to invest their funds in their core business.
Although properties on triple net leases can be multi tenant most are single.
Double net leased (NN) properties have some carve outs that are the owners responsibility. Typical carve outs are roof and structure. Double net leased properties are sold at a higher cap rate to offset the additional potential expense. New double net lease properties frequently come with warranties for the roof and structure from the developer.
Tenants in Common - TIC
From the investors prospective TICs are synthetic triple net leases. They have little to no management reasonability and receive a monthly check.
The major negative to TICs over triple net leases is that the investor does not have the sole say in what happens to the property.
The major advantages of TIC are as follows:
1. Spreading risk through diversification. The net proceeds from a sale may be split among several properties, in different geographical markets and asset classes (retail shopping center, multi family, or office building).
2. A TIC investment is turn key. The sponsor provides a comprehensive due diligence package; arrange financing and facilitates the investment process.
3. For investors with limited funds the TIC gives them the opportunity to invest in larger, better quality, institutional grade properties with credit tenants not available to them otherwise. Frequently larger properties have a better risk reward ratio.
When deciding between a Triple Net or “Synthetic” Triple net (sole ownership or TIC) investment, an investor's personal preference, financial resources and needs must be carefully considered.
Many prefer Sole ownership allowing more control over the property, specifically on when to sell or refinance the property. Others are willing to give up some control in return for the ability to better manage risk through diversification and the ease of purchase.
It is important that the investor remember that TICs are simply a form of ownership and the same factors that create risk in any other real estate investment can be found in the underlying TIC property being purchased.
Since the IRS issued Rev Proc 2002-22 in 2002, TICs have qualified as 1031 exchange replacement property. Rev Proc 2002-22 is a set of 15 guidelines that must be followed by TIC sponsors.
Before making a major financial commitment investors should consult with their legal and accounting advisors to make sure the contemplated investment is appropriate for them.
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