1031 Exchange and Triple Net Lease

Single tenant, triple net leases differ from other types of leases in two important ways; in terms of the numbers of tenants and in terms of the investor’s responsibilities. Most residential and commercial rental property investments such as office buildings, apartments and mini-warehouses have multiple tenants and the real estate owner must pay operating expenses and provide on-site management. The owner, or landlord, leases out individual units for short terms, renovates each of the premises, collects the rent, pays the property taxes, maintains the property, and is responsible for all insurance, legal, accounting and other expenses. This is often costly and painstaking work, which is eliminated under a single tenant, triple net lease.
In a single tenant, triple net lease agreement the large corporate tenant agrees to be responsible for all of the expenses associated with the ownership of the property in return for a long term lease. The investor/owner’s role in a triple net lease is thus a passive one – effectively like “coupon clipping” in bond investments. The investor just collects and records regular lease payments. Single tenant, triple net leases are often considered “armchair” investments due to the presence of only one credit worthy, corporate tenant and no managerial responsibilities or associated expenses to curtail the investor’s return

In order to properly report your 1031 Exchange to the IRS, you must submit IRS Form 8824. This is the IRS’ official form (2 pages) that you must submit with your federal tax return to report the details of your 1031 tax deferred exchange. Often you may be required to submit additional tax forms and specific calculations that relate to your exchange, but typically IRS Form 8824 is the only document used to report the 1031 Exchange.
For the record, one must file IRS Form 8824 simultaneously with your tax return for the year in which you sold or transferred property. The date of the purchase of the Replacement property holds no barring. As an example, if you sold or transferred your original property on November 28, 2003 as part of your 1031 exchange, and purchased your Replacement Property on January 10, 2004, you would need to file IRS Form 8824 with your 2003 tax return.

When you elect to do a 1031 exchange, you are allowed to designate three properties or utilize the 200% rule.
The 200% Rule basically means that you cannot exceed 200% of the selling price of the Original property when you designate four or more Replacement properties. Interestingly enough, there is no technical limit to the sum of the purchase prices for three or fewer replacement properties.If you sell your Original property for $1,000,000, you can theoretically identify up to three properties for any amount of money. However, if you identify a fourth replacement property, thereby electing to use the 200% Rule, the total sum value of all four properties cannot exceed 200% (or twice) the sales price of your Original property.

The IRS is extraordinarily strict about this rule and even the slightest dollar over the 200% with disqualify your 1031 exchange.

A new “safe harbor” rule has been created by the Internal Revenue Service which allows the owners of vacation homes (2nd homes) to utilize a 1031 exchange their commercial properties. In order to be eligible for the “safe harbor”, the vacation home must be a dwelling- in other words, a single family house, a condominium, a town house or similar structure that provides basic accommodations found in a dwelling (sleeping area, cooking facilities and bathroom facilities, etc.)The vacation home (or relinquished property) must pass two of the following tests:

1. The party must have owned the vacation home (or relinquished property) for a minimum of twenty-four (24) months immediately prior to the 1031 exchange.

2. Within each of the two (2), twelve (12)month periods during the 24 months prior to the 1031 exchange:
a. The investors must have rented/leased the property at fair market rates for at least 14 days;
b. Any personal use of the property could not have exceeded the greater of 14 days or 10% of the days the property was rented out at fair market rates.

The commercial property (or replacement property) must pass two the following tests:
1. The party must continue to own commercial property (or replacement property) for a minimum of twenty-four (24) months immediately following the 1031 exchange.

2. Within each of the two (2), twelve (12) month periods during the 24 months immediately following the 1031 exchange: a. The investor must rent out the property at fair market rates for at least 14 days;
b. Any personal use of the property cannot exceed the greater of 14 days or 10% of the days the property is rented out at fair market rates.

The Qualified Intermediary (or “QI) industry is unfortunately unregulated and many QIs place their client’s funds in a commingled account versus segregated individual accounts.
As we saw in my previous postings (1031 Exchange- Importance of a QI), if the QI’s company get caught up in illegal activity, not only can you lose all of your money, your exchange may fail- thus leaving you with a probable capital gains tax burden. Your only solution may be a legal battle as in the case of Edward Okun and you still may have a failed exchange.

Also noted on “expert1031Blog” was court case (91 AFTR 2d 2003-1850)
“The courts ruled that because the exchange proceeds were in a commingled account, they were a “bankruptcy asset” – and available for the creditors of the bankruptcy proceedings. So all of the clients’ proceeds were used to satisfy the creditors – including those clients who had already taken their money out within the last 90 days to purchase their replacement property! They had to give their money back to the courts and creditors!”As I mention in my book, “The ABC’s of 1031 Exchanges and Triple Net Lease Properties”, one of the keys to a successful 1031 is to find a reputable QI that is both bonded and insured. While searching for the right QI, make sure they use separate accounts for each of their client’s monies and have a great reputation in the industry.
There are a couple of great large financial institutions and title companies that are great examples of QIs.

A client recently received contradictory advice from an accountant and QI with regards to the “Year and a Day Rule” which created a great deal of confusion for the client. Their CPA encouraged them that they needed to hold their property for one year and a day to effectuate their 1031 Exchange properly. Furthermore they were told that they were to hold their replacement property for a minimum of one “Year and a Day” as well.
The “Year and a Day” rule is technically not the law. In fact nowhere in the Section 1031 guidelines is there any mention of this. We were also told that there is no tax court decisions, regulation or any other authority that addresses the “Year and a Day” rule.
A close QI friend of ours explained what the intent of the “Year and a Day” rule as …..”when you bought your original property or your replacement property with the idea/intent to not re-sell at the time, then the 1031 Exchange can endure IRS scrutiny regardless of holding the property less than one year and a day.

1031 1031 Exchange Tax Defer

Under Section 1250, if there is any depreciation subjecting to be recaptured at the time of the 1031 Exchange, no recapture takes place if there is no gain to be recognized on the 1031 Exchange. The depreciation is carried forward and becomes part of the replacement property.
In the event there is gain to be recognized because of the net boot received, then the primary gain recognized is the ordinary income from recapture. Now, in the event that the total gain is greater than the ordinary income from recapture, the remaining balance is a capital gain.

Triple net lease, net lease, single tenant, Walgreens, CVS

Who are some of the companies for whom Horn Capital Realty, Inc. has completed triple net lease transactions?

NEW YORK, Oct 17, 2011 (BUSINESS WIRE) — American Realty Capital Trust III, Inc., (”ARCT III” or the “Company”) announced today that it had acquired two Walgreens pharmacies with a combined 26,172 square feet of space located in Staten Island, New York, and Coalinga, California, for a total purchase price, excluding acquisition costs, of approximately $9.2 million.

The Company acquired a ground leasehold interest in the 11,610 square foot Staten Island property, which is 100% leased to Walgreen Eastern Co., Inc. The lease is guaranteed by Walgreen Co. WAG -1.24% , which is rated “A” by Standard and Poor’s. The original term of the triple net lease for the Staten Island property is 25 years with approximately 21.5 years remaining in the primary term.

The Company acquired a fee simple interest in the 14,820 square foot Coalinga property, which is 100% leased to Walgreen Co. The original term of the triple net lease for the Coalinga property is 25 years with approximately 22.1 years remaining in the primary term.

“We are very pleased to have closed these two acquisitions so quickly after completing our first purchase of the FedEx Freight build-to-suit freight distribution facility in Butte, Montana. They are consistent with our strategy of purchasing freestanding, single-tenant properties net leased to strong credit tenants diversified by geography, tenancy, lease term and industry,” said Nicholas S. Schorsch, Chairman and CEO of ARCT III. “These two acquisitions complement and further diversify our existing portfolio and increase our total assets to approximately $21.3 million.”

American Realty Capital Trust III, Inc. is a publicly registered, non-traded real estate investment program that has commenced its initial public offering of up to 150.0 million shares of common stock, at a purchase price of $10 per share, for an aggregate offering amount of up to $1.5 billion. The Company intends to use the proceeds from the offering to acquire properties that are single tenant, long-term net leased to investment-grade and creditworthy tenants. The Company is offering the shares of common stock on a reasonable best efforts basis through its affiliate, Realty Capital Securities, LLC, the dealer manager of the offering.

A registration statement relating to the offering of these securities has been filed with the U.S. Securities and Exchange Commission and declared effective. The offering will be made only by means of a prospectus. Copies of the prospectus for the offering may be obtained by contacting: Realty Capital Securities, LLC, Three Copley Place, Suite 3300, Boston, MA 02116, Tel: 1-877-373-3522.

This press release shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

This press release may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results and trends could differ materially from those set forth in such statements due to the following risks: The failure to qualify or maintain the requirements to be taxed as a REIT would reduce the amount of income available for distribution and limit the Company’s ability to make distributions to its stockholders. No public market initially exists for the Company’s shares of common stock, and one may never exist for this or any other such type of real estate program. Securities are being offered on a best efforts basis. These are speculative securities and as such involve a high degree of risk. There are substantial conflicts among an offering and its sponsor, advisor, dealer manager and property manager. There is no assurance that the value of the real estate will be sufficient to return any portion of investors’ original capital. Operating results will be affected by economic and regulatory changes that have an adverse impact on the real estate market and we cannot assure you that there will be growth in the value of the properties.

To arrange interviews with executives of American Realty Capital Trust III, Inc. please contact Tony DeFazio at 484-532-7783 or tony@defaziocommunications.com.

SOURCE: American Realty Capital Trust III, Inc.

Currently on Triple Net Lease deals, a cap rate of 6% to 9% are market rates for triple net lease real estate- obviously depending on the tenant’s creditworthiness. In the past, one also could count on a 2% to 5% annually compounded, property appreciation for every year the real estate is owned. Before the drop in the economy, the internal rate of return on a 15 year all cash investment, including tax savings, can be greater than 12% per annum. Triple Net Lease properties are a great alternative to traditional fixed income investments because of their predictable returns.