Triple Net (NNN) leases and Delaware Statutory Trusts (DSTs) are essential options when investing in real estate. For this reason, we will briefly define the function of each and then dig into how they work together effectively.
What is a NNN (Triple Net Lease)?
Commercial real estate leases can take various forms, including gross, single net, double net, triple net, and absolute net. The NNN structure is attractive because it offers consistent income with minimal management responsibility. Typically, with an NNN lease structure, the tenants are responsible for a pro-rated share of the cost of insurance, property taxes, utilities, and operating expenses. The owner is responsible for major repairs to the roof and structure.
Tenants may appreciate the ability to manage the property according to their needs, especially if the NNN is for a single tenant. Also, the NNN lease will likely offer a lower rent due to the tenant accepting the other expenses. Landlords may find the NNN attractive because it requires little ongoing oversight, assuming they engage with a reliable tenant.
What is a DST?
A Delaware Statutory Trust is an option for accredited investors who want to invest in commercial real estate they can’t buy individually. An offering sponsor creates the DST, and the project usually has a specific term. The sponsor identifies and acquires the property and then markets the project to investors.
DST investments are limited to accredited investors because they are private placements, which means that the sponsor doesn’t need to disclose the same level of detail about the investment risks as they would if the offering was publicly traded. That potentially limited information is why the SEC limits access to accredited investors, who are assumed to have the knowledge and experience necessary to make appropriate risk evaluations.
Why choose a NNN DST?
As an investor, N leases offer the advantage of nearly passive investments. Since the tenants are responsible for most of the management and expenses, the owner or investor doesn’t have significant involvement. The lessee is often a well-known national company with a visible presence. That company chooses not to own real estate but nonetheless wants control over its property.
Using a DST as the ownership vehicle for NNN properties further enhances the passive nature of the investment. That’s because a DST is created by a sponsor, who then engages with a master tenant to sublease the space in the properties the DST holds. If the DST focuses on NNN-leased properties, the master tenant is likely the single tenant, and they assume the primary responsibility for the building’s operation.
This arrangement allows the investor to enjoy the benefits of investing in a DST (including using a 1031 exchange to enter into and exit from the DST) and to own a fractional interest in high-quality commercial real estate.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure.
All investments have an inherent level of risk. The value of your investment will fluctuate with the value of the underlying investments. You could receive back less than you initially invested and there is no guarantee that you will receive any income.
Programs that depend on tenants for their revenue may suffer adverse consequences because of any financial difficulties, bankruptcy or insolvency of their tenants.
No public market currently exists, and one may never exist. DST programs are speculative and suitable only for Accredited Investors who do not anticipate a need for liquidity or can afford to lose their entire investment.
