Have you heard about triple net lease properties but aren’t sure exactly what they are?
Triple Net Lease properties are excellent passive investment vehicles, and if you’re interested in preparing for retirement while diversifying your portfolio, then Triple Net properties are one of the best ways to do that.
What Is The Difference Between A Net Lease And A Triple Net Lease?
Single Net lease (N Lease)
Single net leases pass on maintenance, repair, and some tax expenses on to the tenant. This is in addition to base rent, utilities, and any shared common area expenses.
Double Net Lease (NN Lease)
Double net leases require tenants pay all of the above expenses, plus insurance premiums. The owner must still pay for capital repairs such as a roof for structural repairs.
Triple Net Lease (NNN Lease)
Triple net leases require the tenant pay all costs associated with the property; however, tenants retain a higher level of control over the property and pay a lower base rent.
Costs include all of the above, plus all operational expenses (cleaning, landscaping, routine maintenance, etc) and capital expenses, up to and including structural repairs such as the roof and HVAC systems. Some owners also use bonded net leases, which stop tenants from breaking the lease if expenses are higher than anticipated.
What Is the Average Length Of A Net Lease?
While the length of a net lease will vary depending on the tenant, net leases in general range from ten to twenty years with five-year renewal options. This means you don’t have to worry about tenant vacancies or finding a reliable tenant, as long as you’re not at the end of the lease.
How Do I Know If A Lease Is A Triple Net Lease Or Not?
Just because a seller tells you a lease is a triple net, don’t assume that it actually is one until you examine the lease carefully.
Unfortunately, it does occasionally happen that sellers claim a lease is a triple net, only for the buyer to discover – usually after an expensive repair is needed – that the lease is just a double or single net.
This is more likely to occur with older buildings, but the best way to know the difference is to carefully read the fine print of the lease, or have your lawyer or experienced broker familiar with the property walk you through the details.
Of course, there are some smaller expenses, like legal costs or accounting costs that can’t be passed onto the tenant, but these are minimal.
Are All Net Leases The Same?
Not all net leases are the same, for the simple reason that not all tenants are the same. Franchise-based leases are riskier than corporate-backed leases, where the parent company will cover a tenant’s rent if things go south. Even within corporations, some are more high-performing than others, so due diligence is essential, no matter how big the name.
What Should You Look For In A Triple Net Lease?
There are three main things you should look for in a potential triple net property: the lease, whether there is a termination clause, and whether rent increases are included.
In terms of the lease, it is essential your investment team – minimally your broker and attorney – read through the entire lease, including all exhibits, supplements, and amendments. As the saying goes, the devil is in the details, and you certainly cannot rely on the seller to disclose facts that may delay or deter the sale of their property.
Termination clauses are critical since if a tenant decides to abandon ship before the lease ends, you could end up with a vacant property, with all the headaches that entail. Even worse, if a tenant has the ability to leave the property early, the value of the property – which is largely built on the length of the lease and the strength of the tenant – plummets.
With a long-term lease, periodic rent increases are essential. Rent increases are therefore included to ensure the investment retains its value and to counteract the effects of inflation. Rent increases take one of two forms: percentage increases, which increase the rent by anywhere from 5% to 15% per year, or annual rent increases.
Why Do Some Triple Net Properties Have A Lower Cap Rate?
There are several factors that affect the cap rate of a triple net property.
The location of the property is a big factor, as is the length of the lease. The shorter the lease period remaining, the higher the cap rate and the lower the price. With low cap rate triple nets, you’re paying a higher price for steady, long-term returns.
Market growth possibilities, as well as the particular city and state, also play a role. Primary markets are expensive than secondary or tertiary markets. A Rite-Aid in a Class A location will have a different cap rate than one located in a less desirable area, even within the same city or state.
As an investor, you should choose a triple net property based on your investment goals, rather than being blinded by popular locations or “in” cities.
How Hard Is It To Find Good Triple Net Properties?
Good triple net properties aren’t hard to find – if you know where to find them. Some investors trawl sites like Loopnet looking for a good deal, but in reality, the vast majority of deals are off the market.
That’s not because brokers are intent on holding the best properties for their clients. In reality, many sellers aren’t interested in dealing with every Tom Dick and Harry interested in a triple net property.
They want to work only with qualified buyers who are serious and won’t waste their time. They also know that experienced buyers have an extensive network of buyers and other brokers, and will be sure to recommend the property to their best prospects.
This ends up being less stressful for both sides, while still getting a fair price for their property.
