With more positives than negatives, an inflationary interest rate environment can
be positive for real estate investors. As always, the net benefit to a net lease
investor is NNN property specific. Generally, as inflation moves up, so too do
interest rates get tweaked upwards by the Fed to reduce asset prices and consumer
prices in an inflationary environment. This causes a rise in mortgage rates and
thus dampens the overall level of acquisitions activity of NNN properties.
But careful, nnn investors with access to historical debt at low cost continue to
acquire NNN properties, especially those tenanted by medical, auto parts, grocery,
QSR/fast foods, and child care tenants, even as interest rates are rising. Such
investors not only have lower costs of capital, but also realize that their
accumulated debt portfolio (“dry powder”) is a bigger negative for the lender whose
rate of return on the debt is being eroded by inflation!
Asset prices of quality triple net lease properties do not decline as much as they
should because demand does not get affected as much. In other words, NNN
property cap rates remain stable for longer periods of time, than one would think,
even during inflationary environments. For NNN properties with greater risk,
especially speculative properties or properties with uncertain “upside”, the price
decline is greater in periods of inflation. Developers and triple net lease investors
need to be aware that these price declines for riskier NNN projects will be further
offset by escalating costs of labor and materials in an inflationary environment.
Then again, NNN net lease rents are typically tied to consumer prices and rise with
inflation, pushing up property income. Whilst inflation raises construction costs, it
benefits existing NNN investors because they can expect less competition from new
NNN projects in their property’s geography.

Wait, there is more. In today’s inflationary times, triple net leases are still typically
backed by investment-grade lease guarantees by NNN tenants. During periods of
inflation, NNN leases continue to relieve owners of all management and
maintenance, etc. Further, net lease Investors can receive up to 25 years of
passive, income with elevated IRRs because of rent escalations, avoiding the
inflation bite. Lenders remain keen to mortgage triple net properties and often
extend favorable terms to NNN net lease investors versus other types of
commercial real estate. During inflationary periods, NNN triple net lease properties
can still be conveniently bought and sold within 1031 exchanges to build inter-
generational wealth, (For a while it seemed that the Biden Administration was going
to risk a loss of more than $20 billion annually in tax revenue from 1031 exchanges
by limiting the breadth of like-kind tax exchanges of real estate, but that will not
happen at all. IRS Tax code 1031 is off the table for modification.)

Your team of nnn advisors at the Triple Net Investment Group, have successfully
navigated for hundreds of repeat NNN investors through decades of business
cycles, and can offer unique, actionable insights into your net lease investment opportunities today.

Contact one of our nnn brokers today, for a free consultation
at 202-361-3050.

Death Taxes and how to lower them

A death tax is a tax on a property transfer (after death) typically for estates
larger than $12.0MM. This number may change if and when Congress
doesn’t renew Trump’s Tax Cuts and Jobs Act, but the hurdle could still be at
least $5.0MM. In essence, large estates can potentially get taxed four times
– one, on the assets in the estate by the federal and some state
governments; second, on the assets received by the beneficiary at the state

level and third, on the incomes generated by the assets at federal and/or
state levels.
There are 2 components to the “death tax” – one, the inheritance tax, paid
by the beneficiary who inherits an estate and two, an estate tax, paid on the
property and assets before the fact of transfer to a beneficiary. The estate
tax is typically paid to the federal government (up to 40% of the estate)
AND to 12 states. These states are: DC, Oregon, Rhode Island, Vermont,
Illinois, Minnesota, Maine, Maryland, Massachusetts, New York, Washington,
Connecticut, and Hawaii.
Luckily for NNN investors, the federal government does not levy inheritance
taxes. However, a few states–Maryland, Pennsylvania, Nebraska, New
Jersey, Iowa, and Kentucky–still charge inheritance taxes to beneficiaries,
excluding spouses.
In 2022, if an NNN investor has $12.0MM or more in their estate (higher in
2023), they can lower (or avoid) their “death tax” burden by: either, by
placing their estate in a specially designated trust, or by giving away their
estate prior to death to reduce its dollar value below $12.0MM, or, by
making a qualified charitable donation, etc. Details below:

Reduce the size of your estate: a combination of a spend-down and transfer
tax strategy that ensures a solid inter-generation transfer of wealth and
allows for a luxurious lifestyle whilst alive. NNN investors could consider
using the unlimited marital deduction. This amazing provision in the tax code
removes both the federal gift and estate taxes on estate transfers between a
married couple;
Charitable deductions: deduct contributions from an investor’s triple net
lease asset portfolio to select charities;

Transfer your properties to kith and kin, whilst living: but NNN property
owners should keep in mind the cap of $12.06MM (double if both spouses do
so) in 2022 and slightly higher limit in 2023. Consider the use of the Unified
Tax Credit. This is a dollar for dollar tax credit that combines gift taxes with
estate taxes to decrease the tax bill of a triple net property estate;

Use special trusts: by setting up a tax stratagem such as a GRAT, a version
of an living trust, the property in a NNN portfolio gets tax sheltered, whilst
the income generated and distributed from such a trust can be used for an
investor’s or next of kin’s lifestyles at lower rates of taxation.

Thus, it may be beneficial to consider suitable NNN properties without estate or
inheritance taxes, and in one of eight states with zero income tax, and zero
capital gains taxes. These states are: Texas, Washington, Nevada, South
Dakota, Wyoming, Alaska, Florida, and Tennessee.

For a national selection of superb, tax-advantaged NNN net lease investment
properties, call on your expert nnn advisory team at the Triple Net Investment
Group, led by broker Robert Gamzeh, 202-362-3050 or email robert@nnnig.com.

Article: Talmudic principles for real estate investing

The oral Torah is comprised of the Talmud, a collection of Hebrew texts. The
popularly cited Babylonian Talmud dates to about 500 CE. The two

components that make up the Talmud are the original source (Mishnah), and
the Gemara (includes elucidations on the Mishnah).
There are many translations that mention the Talmudic principles of real
estate investing. In one, Rabbi Yitzak wrote, “A person should always divide
his money into thirds: one third in land, one third in trade, and one third in
hand”. In another, the same Rabbi Yitzak further instructed: A person should
always have his money at hand, as it is instructed. And hold fast to this
money in your hand”.
Beyond these proclamations, the Talmud unequivocally mentions
diversification as a key strategy to mitigate and manage risk. Acolytes learns
this principle modeled by their leader Jacuv, who when threatened with
attack divided his family caravan into two clusters. The text declares, "Jacuv
divided the family and the herds into two camps”, and Jacuv said, “If Aesop
attacks one camp, the second camp will flee and remain intact".
In present times, when purchased free of debt, NNN real estate remains a
steady growth engine. The reason triple net real estate is considered risky is
because many investors will use massive amounts of debt to generate
excessively high IRRs. However, leveraged, risky, property portfolios do not
satisfy the Talmud’s recommendation for financial resilience.
The land or real estate section of the Talmudic portfolio is about building on
a non-leveraged, solid, stable, financial core. Keeping a constant chunk of a
portfolio in this “risk-capped” (net lease) NNN category provides the stability
required for undertaking significant risk with the rest of the portfolio. Whilst
this first 33% provides a resilient, steady value, the net lease investor is
further tasked with committing talent and the next 33% of resources, to a
business. But unlike long term U.S. stock market returns, which average just
8 -10% CAGR, business or trade in Talmudic times offered the risk and
potential for 100-500% CAGR. But these kind of buy low, sell high,
opportunistic, businesses require high levels of cash in reserve (or, at least
another 33% in available cash) – the third leg of the Talmudic investing
stool.
Asymmetrical investing provides the opportunity for elevated return but
absent devastating risk. In Talmudic times, losing one’s assets meant
complete annihilation. And even today, heavily leveraged NNN net lease real
estate investors face total destruction in many scenarios. The Talmud guides
triple net lease investors to creatively mitigate high risk/high return
opportunities with the requirement of building inter-generational wealth.
Triple net investors well understand that the avoidance of all risk can

imply significant paucity in income and asset growth, a very undesirable
option for investor generations.
A true Talmudic portfolio can we well represented by a bar-bell type of
balance between future and present property reward-risk outcomes. And
famed present day, NNN real estate investors who use asymmetric, barbell
approaches to building real estate portfolios, are following a tried and tested
strategy from ancient times.
At the Triple Net Investment Group, we respect and strongly believe in the
investing traditions of our net lease clients. We believe that even today, the
Talmud’s principles apply and give highly profitable and resilient guidance to
NNN investors. Talk to us and find out how we can fine tune your NNN
investment opportunities to greater success.

Step-Up in Basis for Inherited Properties

The step-up basis tax rule for inherited properties can be criticized as a tax break
for the rich. The Center for American progress declared that a majority of the
financial advantage goes to the top quintile of taxpayers. Some defenders of
the step-up basis posit that this effectively impacts estates with a double dip tax
when the federal estate tax is also considered. During the Biden Administration, a
proposal nearly eliminated the step-up in basis for assets more than $2.5MM, but it
fell through.
Conceptually, when a property gets inherited, the difference between an inherited
NNN property’s revised basis and the amount realized upon sale generates a capital
gain (or loss) that is a taxable event. Thus, a step-up basis reflects the
accumulated capital gain (or depreciation recapture, amortization and depletion) of
an inherited NNN investment.
For instance, an investor who inherits a NNN strip center for $5MM versus the
original purchase price of $3MM creates a step-up in basis. Effectively, the new,
current, stepped up, price of the property eliminates the (taxable) gain
accumulated from time of purchase to time of inheritance. Now, the $5MM price
becomes the cost basis for any future sale, not the original purchase price of $3MM.
(Of course, if the price of an asset has declined from that paid originally, a heir’s
cost basis would step down instead of stepping up.) Similarly, even if the owner of
the property had placed it within a revocable trust, then the heir becomes eligible
for a step-up (or step down) on the basis.
Unfortunately, the unmitigated, uncapped step up basis described above no longer
applies to properties inherited after December 2009. Present tax laws have altered
the cost basis of an inherited triple net lease property to the lower of its tax basis
or fair market value. In other words, the original concept of a “step-up” in basis
may transform into a “step-down” in basis because the lower of two values is
applicable! Furthermore, the capital gain (or depreciation recapture etc) is also no
longer unlimited but capped in dollar value.
Investors should take special note that in states without community property laws,
after the demise of a spouse, jointly-owned property receives only 50% of the
step-up in cost basis vis a vis the 9 community property states.
If you are facing the prospect of an inheritance, especially of a NNN property, allow
our experts at the Triple Net Investment to assist you in the complex considerations
that may call for a purchase or sale or 1031 exchange for maximum tax advantage.
Broker Robert Gamzeh and his team expertly understand the implications of tax
nuances in net lease properties within varied ownership structures.

A changing NNN market

Despite ongoing Fed restriction of monetary supply and rising interest rates, financial conditions have
relaxed in recent months. But curiously this laxity, together with a strong labor market, suggests that the
Fed may continue to hike interest rates. Experts say that we can expect to see waves of inflation and
interest rate hikes (and declines) in the next five to ten years. In other words, inflation won’t exactly go
away, one way or another, for the short and medium term.
On fixed-rate, bond-like, triple-net lease NNN properties, landlords cannot increase a property’s rental
income to offset rising costs since most rents are negotiated years in advance and, any escalations are
nominal for the lease term. This long term, contractual rigidity makes inflation a major challenge for
NNN landlords and investors. And these are a few ways in which net lease investors and landlords are in
a changing NNN market and adapting to this “new inflationary normal”:

• • ♦Sale-leasebacks are becoming popular within restaurants, warehousing, medical
    practice triple net lease tenants;

• • ♦Municipal appraisers have used cap rates that are not current or inflation-adjusted or risk-
    adjusted properly for NNN properties, thus leaving assessed values for ad valorem municipal
    property taxes to be inflated – this will require massive vigilance and appeals by investors;

• • ♦Triple net lease investors are in a flight to quality by: a) better vetting and understanding tenant businesses and obtaining solid financial guarantees and b) cherry picking tenants that will not struggle during economic troughs;

• • ♦Landlords are sharing more information with tenants and talking about much more flexibility in lease terms and rent structures. Such collaboration and the levels of engagement are very different versus previous inflationary economic cycles;

• • ♦Because of soaring industrial demand many NNN industrial properties are overpriced, which includes investors paying a premium price;

• • ♦Shorter net leases (5-7 years) and greater flexibility in lease terms are being negotiated to accommodate net lease market volatility;

• • ♦Athleisure, restaurants, discounters, groceries, apparel, and theaters, fitness centers and entertainment venues – these are all top performing NNN retail categories;

• • ♦Other classes of users and investors are rapidly entering NNN lease structures, including office, veterinary, professional services, industrial, schools, gyms and medical

• • ♦NNN department store tenants are offering shop-within-a-shop concepts and boutique department store concepts like Market by Macy’s and Bloomie’s;

• • ♦Strong regional and local tenants are being increasingly being used concurrently with investment grade tenants by net lease landlords.

The Federal Reserve has announced multiple increases in interest rates to lower consumer demand,
which will impact cap rates eventually – even if cap rates are holding steady right now. Some studies
predict that if inflation and interest rates continue to trend upward, this dynamism will have a big
negative impact on the NNN asset valuations. However, other experts believe that the future rise in
rates has already been baked into current net lease valuations, and interest rates will not continue to
rise as seen prior. In essence, if the Fed does not push too far on rate hikes NNN markets will slow, but
not implode.

Your team of advisors at the Triple Net Investment Group, have successfully navigated for hundreds of
repeat NNN investors through decades of business cycles, and can offer unique, actionable insights into
your net lease investment opportunities today. Contact us today for a free consultation at 202-361-
3050.