Multifamily into Triple Net Leased (“NNN”) Investment(s)
151 S. MYERS ST. 92054 (DOWN-LEG)
INTO OUT OF STATE NNN INVESTMENT(S) (UP-LEG)
In Q1 of 2013, a longtime owner/operator of a well-located 12 unit apartment property near downtown Oceanside, and one block from the beach, came to an age where he could not effectively manage the property any longer, yet could not imagine paying significant capital gains taxes by cashing out, so decided to go the route of doing a 1031 exchange out of the apartments and into a much more passive investment property type, namely, fast food-oriented single tenant triple net leased (“NNN”) investments, out of state for improved cap rates (rate of return) as compared to California, on long term leases, generating income reflecting better than a 5% cap rate from day one, with basically no landlord responsibilities.
The long-term lease(s) in this case were guaranteed by well-established corporate and franchise operators (including a Krystal Burger and a Dollar General). Today, many of the better/more risk averse NNN investment properties with corporate guaranteed leases in-place by a strong credit tenant (like Jack in the Box, Starbucks, et al.), with an initial lease term of say 10-15 years, plus four 5-year extension options, will usually sell in the lower 4% cap rate range going in, sometimes with 5% to 10% rent increases every 5 years, which can vary depending on exact location and age of construction, among other factors.
The seller in this case fulfilled their objective, by deferring any capital gains tax event, while maintaining his income stream from the apartment property equity, and getting out of the day-to-day management operations that multifamily investments require, by trading into a more passive income property(ies) where the tenant is a credit rated corporation that is responsible for handling all operating costs at the property, including all operating expenses, property insurance and property taxes. By trading into the right NNN investment properties, this
investor improved upon his cash flow from equity, as well as freed up precious time to enjoy his retirement years, while continuing to collect checks each month from these more passive investment properties.