Two of the more popular investment options available to 1031 exchangers are the triple net (NNN) lease and the Delaware Statutory Trust (DST). At Chicagoland 1031 Exchange, we’re often asked how the two investment approaches compare. To help answer that question we thought a post highlighting some of the similarities and differences would be beneficial.

The triple net lease gets its name from the fact that the property tenant is responsible for paying the three main categories of operating expenses: property taxes, insurance, and common area utilities. These are generally wrapped into the monthly rent payment. 

NNN leases may be favored by investors for several reasons, including:

• Leases are generally signed for 10 years or longer and usually have built-in rent escalations, so the hassles of renegotiating leases and securing renewals are infrequent.
• Property management functions are mostly the responsibility of the tenant, so investors can receive income without the time-consuming aspects of managing a property.
• Some triple net tenants are of high-credit quality, which may offer investors peace of mind in the assurance that rent will be paid. 

As with any investment, though, there are risks and disadvantages to consider with a NNN lease. They include:

• Some expenses, such as accounting fees and legal costs, remain the investor’s responsibility.
• Investors’ income may be lower than other investments. This is because the tenant is incurring the operating costs of the property, which are factored in when negotiating rent payments.
• Investing in a single-tenant property relies heavily on the quality of that sole tenant, and if that tenant fails, the investor’s income is likely to be reduced or eliminated completely. Investing in multi-tenant net lease properties offers tenant diversification. However, leases are typically shorter and likely more effort and time will be required by the property owner.
• Triple net lease properties can also be hard to locate, conduct proper due diligence, and close on within the time frame of 1031 exchange. Additionally, the price and leverage of available inventory may not meet the needs of an exchanger. 

An Overview: DSTs

A Delaware Statutory Trust (DST) is a unique structure because it allows multiple investors to purchase fractional ownership in an institutional-quality asset. The DST offers many compelling benefits, including:

• No property management responsibilities for Investors since the DST is the legal sole property owner and decision maker.
• Access to institutional-quality properties that most investors could not access or afford on their own.
• The DST is the sole borrower. Since leverage has already been secured as part of the DST, loans are considered nonrecourse to investors.
• DSTs can accommodate much lower minimum investments (as low as 100K) than many other single commercial property investments. This affords investors opportunities to easily diversify their holdings.
• DSTs provide access to many different types of assets, including net lease, multi-family, self-storage, and senior housing.

 Risks and limitations to consider with a DST include:

• Management responsibility resides with one trustee and investors have no operational control or decision-making power.
• Once a DST offering is closed, the DST cannot raise or accept new capital. This could limit the ability of management to make property improvements.
• DST investments are not liquid and may have declining market values and tenant vacancies. They are long-term investments (typically between 5 and 10 years) and generally cannot be sold on a secondary market.

So, Which One Wins?

In our opinion, that is the wrong question. NNN leases and DSTs appeal to different investors for different reasons. The more appropriate question to ask is, “which investment is most appropriate for me?” Each investor’s objectives and tolerance for risk are different and should be assessed thoroughly before a recommendation is made. That is a critical part of the approach we embrace at Chicagoland 1031 Exchange when working with each client.

That said, in our experience working with hundreds of clients who own investment property, we find that many prefer the DST for two prominent reasons:  diversification and financing.

Because of the low investment minimums, most investors can allocate their exchange proceeds into a number of different DST investments. This can provide for diversification in asset type and location, and potentially reduce risk in a manner that NNN lease investments (which are often single tenant in a single location) simply cannot. Also, since a DST that uses leverages has already secured the loan which is nonrecourse to the fractional interest owners, investors need not worry about securing financing on their own or being responsible for non-payment.

We hope this discussion has been beneficial. Don’t hesitate to contact us here or at 224.245.5281 if we can help answer any other questions you may have.