Triple Net Lease, also called a NNN lease is one of the most common leases on commercial properties. Even though these days, this term is being used a lot, it is often misinterpreted by many realtors. So, if you have ever considered Triple Net Lease as part of your investment portfolio, let us clarify some points.
What Does Triple Net Mean In Commercial Real Estate
A Triple Net Lease can be understood as an agreement where the tenant is responsible for all the property taxes, insurance, operating expenses of the property and structural components of the building. Tenants are also responsible for all personal property taxes, repair and maintenance fees as well as for janitorial and other utility services.
If the tenant’s premises are part of a larger property, then the common area maintenance charges are split between the other tenants of the building, based upon the square footage percentage of the total complex. The owner of the property is responsible for the structural stability of the building. The lease agreement covers the obligations of both the owner and the lessee. Usually, Triple Net Lease is used for independent commercial property with a single tenant and the duration of the rent term is ten or more years, with many options for renovation.
A Quick look at the different types of Net Leases :
- Single Net Lease – a lease structure where the lessee agrees on paying a monthly fee, including the property taxes. The owner is responsible for all other operating costs of the property.
- Double Net Lease – a form where the lessee agrees on paying a monthly fee, including the property taxes and property insurance. The owner is responsible for all other operating costs of the property.
- Triple Net Lease – a form where the lessee accepts payment of the monthly base rent, including the property taxes, property insurance, and maintenance issues. There are cases when the lessee can be released of his obligations, such as when the property is subject to an eminent domain procedure.
- Bond Lease (or Absolute Triple Net Lease) – where the lessee pays the monthly fee, property taxes, property insurance, and maintenance. With this type of Net Lease, the lessee is not legally protected if he/she neglects to fulfill his or her financial duties.
Benefits Of Triple Net Leases
Triple Net Leases bring stable and consistent income, and many investors prefer this type of investment (as they are more landlord-friendly). By passing on almost all of the costs to the tenant (property taxes, building insurance, maintenance etc.) the investors can receive much higher profit. Also, Triple Net Leases are usually long-term leases with rent increases built in, so there is no need for regular lease renewals or adaptations.
The landlord is accountable for calculating the property taxes, insurance, and maintenance costs, and that is why Triple Net Leases have lower rental rate than other leases. With lower rental rates, the lessee agrees to make possible internal changes to the property and the landlord is released from any internal changes and improvements.
A Triple Net Lease contract allows for the passing on of responsibility, which means that all cost payments are passed on to the tenant. In most cases, the tenant is responsible for all the major repairs. However, there are cases when the landlord may be given this responsibility (repairs such as roofing, plumbing, HVAC etc).
Triple Net Leases are considered as a stable and secure income investment, since they allow continuous cash flow from long-term tenants at a desirable rental rate while building equity.
Management responsibilities are reasonable, and therefore landlords are able to learn and mature with this type of income investment. The occupants are usually single tenants, releasing the landlord of diverse tenants and numerous lease terms and vacancies.
Potential Risks Of Triple Net Leases
As with other businesses, Triple Net Investing also carries a certain amount of risk. No one investment can guarantee 100% security, and many people fail to consider the risks. Bankruptcy, high loan rates, termination of lease costs are just some of the few.
For example, let’s take Single NNN properties, which are either tenanted or vacant. With a single tenant if the occupant vacates, all the property costs, insurance and maintenance are on behalf of the landlord.
Another thing to take in mind is that usually Single NNN properties are built for particular tenants, so it could be quite difficult, time-consuming, and costly for the landlord to re-lease the same property to another incompatible tenant.
Finally, Single NNN properties are susceptible to higher interest rates. Most investors assume that these properties bear fixed income, but that is not the case.They look like fixed income investments, as they consist of number of fixed payments throughout a specific period of time, but the drawback is that when interest rate increases, the selling price of the properties decreases.
Triple Net Lease vs. Other Commercial Investments
Triple Net leases present a more stable available financial resource in comparison with other commercial investments such as office, warehouse, storage facilities, parking lots, apartments etc.
With gross leases and modified gross leases related to the industrial buildings, the landlord responsibilities are affected by various circumstances. The gross lease is more tenant-friendly, whereas the modified gross serves as a compromise for the convenience of both parties. Even, so the landlord has a greater return regarding work and financial burden, if the duties and responsibilities are passed on to the investor.
Most Gross Lease investors tolerate the various monthly occurring problems, as they are much younger in age. Baby boomers and senior investors are less likely to want responsibility for all of these issues, and therefore they would rather have a smaller, more secure and less demanding source of return.
To Summarize
Even though Single NNN properties carry a certain amount of risk, real estate investors do commonly operate this type of investment. Before getting into this type of investment, make sure to watch out for the potential risks. In order to be successful, you must understand diverse types of businesses and their rental needs and rights, because every business has distinctive requirements and property estimation.
In this article, we have explained the structure of Triple Net Lease and some fundamentals of the NNN lease, as well as significant benefits and risks included in this type of investment. Hopefully, we have addressed any hesitations and convinced you that this might be a worthy opportunity.
