Hello, to everyone
Can anyone explain the concept of the triple net lease as it applies to the subject to existing loan process?
Thanks for any responses provided.
First, the Seller places the property into a trust in his name and selects a Trustee. The Trustee now owns the property and records the deed. Let’s say the seller owes $175K and we agree on a value of $200K. The seller retains a 10% beneficiary interest in the trust.
I am appointed a beneficiary (90%) and sign a triple net lease taking over full responsiblity for mortgage payments, property taxes, maintenance and repairs, etc., from the seller.
Then I locate a tenant and do a sandwich triple net lease with my tenant. Let’s say we agree to a value of $220K. My tenant is granted a 50% interest (leaving me 40%) My tenant now has full responsibility for mortgage payments, property taxes, maintenance and repairs, etc., from the seller. The beauty of this is that I now have zero responsibility for anything.
Let’s say we sell to the Tenant in 3 years for $240K. He refinances the property as an owner.
The original seller’s mortgage is paid off and he gets everything between $175K and $200K. He agrees to dismiss the trust and relinquish his 10% once this happens.
I then get everything between $200K and $220K.
Everything between $220K and $240K is split this way: 50% to Tenant, 50% to me.
The seller’s equity is protected and his property is never at risk until sold.
Mtnwizard, I appreciate including and explaining in great detail the dynamic of the triple net lease. I believe the name of the lease derives from the parties involve in the transaction:
the sellor-that deeds his property to the trust (you select the trustee)
the investor-becomes a 90% percent beneficiary and takes over the responsibility for mortgage, insurance, taxes etc
the tenant- the person granted the majority interest in the trust or property (also assumes mortgage payments and other property obligations]
Therefore, from my understanding, the tenant is being offered a lease with option to purchase contract or the tenant has no option to purchase. The tenant must purchase the property within a given period of time.
If my understanding is incorrect please advise. Thanks again for the information.
The tenant does not have an option to purchase, simply first right of refusal to purchase at the end of the lease at Fair Market Value. The tenant is under no obligation to purchase.
An analogy might be that of the leasing of a car wherein the lessee has virtually 100% of the benefits of ownership of the car without a title transfer; but does never own the vehicle until/unless he or she would decide to buy it for its Fair market value at the termination of the agreement. The lessee has the first right to purchase, but is under no obligation to do so, and receives no more of a contracted bargain price than would anyone else buying the same car if the lessee opted not to purchase.
Mtnwizard, the car analogy was an excellent reference for my understanding. I think I have grasped on some level the dynamics of the triple net lease. It appears from my evaluation that all parties involved in the transaction are winning. I am an investor with limited experience, so I will ask this question. Is there any cons to the triple net lease?
ex. Would declining property values or lack of appreciation of houses in the same market with similiar features influence the profit potential of a triple net lease to an investor?
In addition, thank you for taking the time out of your schedule to address my questions.
This applies only to commercial triple net leases. We are using them for single family homes in a land trust. Completely different animal.
To BooBoo, thanks for referring me to the link concerning the Triple Net Leases. In addition, to mtnwizard, are there any conditions that the triple net lease can be utilized in transactions that involve a property with multiple units?