Benefits of a Triple Net Lease Over a Delaware Statutory Trust
Benefits of a Triple Net Lease Over a Delaware Statutory Trust
When leasing commercial real estate, there are many options available to the lessee. In fact, there are even a variety of lease types that can suit the needs of property owners. Among them are the triple net lease and a Delaware Statutory Trust. Triple net leases are quickly becoming standard for larger properties that have a higher cost basis. This blog post explains what a triple net lease is and why it may be right for your company. It also details some of the benefits of a Delaware Statutory Trust vs. triple net lease. Read on to learn more about triple net leases and their advantages over other types of leases when renting commercial property. If you are going to invest in property, you simply can’t pass by this information.
What is a Triple Net Lease?
Let’s begin with the basics and define the meaning of this term. A triple net lease is a commercial lease where the tenant is responsible for the costs associated with the property. This means that any expenses related to maintenance, repair, and taxes for the property are the tenant’s responsibility under this type of lease. This includes expenses like property management, property taxes, insurance, utilities, and maintenance.
Triple net leases are often used for larger, more expensive commercial spaces. In this type of lease, the tenant is responsible for any increases in these expenses. A triple net lease comes from the fact that the tenant is responsible for three “net” items:
the property’s net income,
the property’s net expenses,
the property’s net equity.
In other words, the tenant is responsible for the property’s income after costs and expenses are deducted, and they are responsible for the property’s equity if the owner decides to sell the property.
What Is Delaware Statutory Trust?
Let’s move on to another option, which is also surely worth your attention. A Delaware Statutory Trust is a type of lease that is very common in the United States. In this lease, there is a trustee that holds title to the property, and the trustee enters into an agreement with the lessee. In other words, the trustee holds the title of the property in trust for the benefit of the lessee. Therefore, the Delaware Statutory Trust is the name that refers to this specific type of lease.
The trustee in a Delaware Statutory Trust lease is typically a third-party attorney who is either the owner of the building or a third-party real estate investment trust. The trustee will hold the deed to the property in trust for the benefit of the lessee, and the lessee will pay rent to the trustee. As with a triple net lease, the tenant will be responsible for any and all expenses related to the property.
What are the Benefits of Delaware Statutory Trust?
Before you invest in this or that option, you need to weigh all the pros and cons and decide which one suits your needs most of all. Let’s list the fundamental benefits of this model for property owners:
Capital gains tax savings: The main distinctive feature of this model is that they allow real estate investors to defer paying capital gains taxes after they sell the investment property.
Better income potential: Delaware Statutory Trusts are focused on searching to preserve investment value. However, the monthly income varies depending on the type of property you have.
Passive property management: When you choose a DST investment, your work is done, and there’s no need to care about property management problems.
Low risk of exchange failure: Statistically, DST exchanges rarely fail.
Why Use a Triple Net Lease?
There are several reasons why businesses choose to use a triple net lease rather than a Delaware Statutory Trust. To begin, an investor or seller may be more willing to enter into a triple net lease with a tenant because they are guaranteed to receive their monthly payments even if the building is damaged. If there is a disaster that causes damage to a property, a Delaware Statutory Trust would likely be terminated. This is because the trustee would no longer have a title interest in the property if it were damaged. Because the trustee is not responsible for repairs, they may terminate the lease.
A triple net lease, on the other hand, has a provision that requires the tenant to repair and restore the property to its original condition. This means that the building owner would have to make repairs and that the tenant would be responsible for covering the costs of those repairs.
Benefits of a Triple Net Lease
There are many benefits of a triple net lease compared to a Delaware Statutory Trust. One of the most significant advantages of a triple net lease is that the tenant is responsible for maintenance and repairs. This is especially true for larger properties where maintenance costs can quickly add up. In this situation, the lessee would be responsible for making sure that repairs are completed as quickly as possible.
There are also tax implications of a Delaware Statutory Trust that are not present with a triple net lease. A Delaware Statutory Trust is considered part of the owner’s estate, and the trustee is considered a co-owner of the property. Therefore, the property will be subject to estate taxes if the owner passes away. A triple net lease does not have any of these tax implications. This is because the tenant is responsible for repairs and maintenance, and the owner does not have to pay to repair the property. This means that repairs are not coming out of the owner’s pocket.
Let’s sum up the main benefits of a Triple Net Lease for both tenants and landlords.
The tenant controls the upkeep and maintenance of the property.
The tenant controls all the property costs, such as water or electricity bills.
It’s a steady revenue stream.
There’s less management hassle because, in this case, all the costs related to taxes, repairs, or utility bills are the tenant’s responsibility. As a result, the landlord has more time to focus on their main business goals.
Disadvantages of a Triple Net Lease
While triple net leases are advantageous to owners and lenders because they know that they will receive their monthly payment even if the building is damaged, they can be disadvantageous to tenants. This is because the tenant is responsible for repairs and maintenance costs. If a tenant has a net income that is less than the amount of repairs, they may be unable to cover the costs of repairs. This is one of the biggest disadvantages of triple net leases.
Another disadvantage of triple net leases is that they are most often used for larger, more expensive properties where the owner is using the property to generate income. This means that smaller, less expensive properties may not be available for lease on a triple net basis.
Let’s briefly list the risks for both.
There’s the risk of the property tax; the cost of insurance may also grow.
If the landlord overestimates the operating costs, the tenant can overpay for some services.
The tenant must spend their precious time on property management.
Finding reputable tenants may be a challenge.
The downtime between tenants.
Is a Triple Net Lease the right choice for you?
If you are in the process of leasing commercial property, you must consider many factors to ensure that you are choosing the right lease for your business. One lease type that you should consider is the triple net lease. This lease type is advantageous for both owners and lenders because it ensures that they will receive their monthly payments.
However, there are other types of leases that are advantageous for tenants. This is because with a triple net lease, the tenant is responsible for repairs and maintenance costs. With this in mind, if you are in the process of leasing commercial property, you should consider the advantages and disadvantages of triple net versus Delaware Statutory Trust leases to make sure you choose the lease that is right for you.
Let’s briefly list the key reasons to invest in triple net lease properties:
Passive income: Such properties have the potential to provide you with a passive income without you having to be involved actively.
No management responsibility: In this case, all these responsibilities fall on the tenant.
Better property value: You have a chance to put the property at a higher rate and improve cash flow.
Stability: This option is considered to be a stable asset.
Overall, it’s up to you to decide which option suits your needs most of all, whether it’s a Delaware Statutory Trust or a triple net lease. You need to evaluate the pros and cons of both options, define your business goals, and decide which option better suits your needs. As with any real estate decision, it’s best to do as much research as possible beforehand. With the right amount of research and due diligence, you can find the right commercial real estate option for your company.
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