The Scoop on NNN Property Expenses

By Marilyn Kane, President, Iridium Capital

Investors who are not in the business of real estate are appropriately attracted to the arena of net lease, especially NNN-lease investment properties. The lure for the investor who does not relish the active management of a property finds that it is ideal to have a tenant, especially a good-credit tenant, who  corporately guarantees the rent.

While true NNN  properties have leases to ensure that the tenant  is responsible for all real estate taxes, insurance, and maintenance costs, there are still some basic expenses in owning a triple net- lease property that the new investor should understand and for which to be prepared.

Creating and managing a new entity, whether it be an L.L.C. or any other entity, comes with basic administrative costs. One of the largest companies that would keep on top of filings and advice of notices for any legal filings related to the investment  is CSC (Corporation Services Co.).  This popular administrative company helps manage an entity’s annual reports, business licenses, permits, and various other corporate filings.  These are necessary administrative filings in order for the entity to maintain its good standing. The cost of having CSC administer would most likely be less than the cost of hiring legal counsel to do the same work. It is a great help to be notified of upcoming compliance than to learn from a municipal entity that a required filing was missed or filed late with whatever consequences would result from neglecting timely filings.

Another cost of owning an entity is the Delaware L.L.C. tax (or whichever state in which the entity is registered). This is a basic tax on any registered entity. These expenses are simply part of the cost of doing business.

While property taxes are set forth in NNN leases as being the responsibility of the tenant, most leases require the taxes be initially paid by the landlord and to be then reimbursed to the landlord by the tenant  after submission of a paid tax receipt from the county where the property is located. With concrete proof that the taxes have been paid, only then is the reimbursement made to the landlord, who has already laid out what is often a substantial sum to pay the taxes when due. If the county where the property is located is slow to send out tax notices or sometimes just do not send tax bills, the landlord must initiate the contact with the county for each property to ensure receiving the tax notification. After the taxes are paid, the landlord must request and secure copies of paid tax receipts for submittal to the tenant in order to receive reimbursement. For large portfolios this process may be tedious, and a system should be set in place so that the process can be replicated each year.

When managing a NNN property, especially a portfolio, it is prudent to escrow some of the monthly rental income in order to outlay the funds that will be needed to pay the real estate taxes on the property (usually by end of March every year).  Once taxes have been paid and a receipt has been sent to the tenant, it usually takes between 30 to 60 days for the tenant to reimburse the landlord for the real estate taxes paid.

As with any investment, it is the wise investor that is aware of all the ramifications involved to best reap the rewards inherent in their NNN investment .