The Ultimate Guide to Triple Net Lease Properties

May 19, 2022

What Does Triple Net Mean?

The term “triple net lease,” or what’s also referred to as a NNN lease, refers to a lease type on single-tenant investment properties in which the tenant takes care of all or most of the expenses including net insurance, net taxes, and net common area maintenance.

  • Absolute triple net lease: zero landlord responsibilities or maintenance costs for the lease term.
  • Modified triple net or double net hybrid: minor landlord responsibilities, i.e., roof, parking lot, structure.

Non-net lease properties, such as multi-tenant buildings and residential rentals, typically operate with gross leases. These require tenants to pay a pro-rated monthly base or “gross” rent that covers the estimated portion of the landlord’s expenses, including property taxes, common area maintenance (CAM), repairs, insurance, management, licensing, interior and exterior upkeep, and more.

Triple net lease investments, tenanted by investment-grade or high-credit tenants, are an attractive alternative to gross lease real estate due to their recession-proof, pandemic-proof stability, guaranteed monthly income for ten to fifteen years or more, and tax opportunities

Two people looking at a laptop screen, reviewing a lease

5 Net Lease Definitions

As you contemplate your financial goals and how active you want to be in your next commercial real estate investment, or if you are new to the CRE market, it’s important to understand the difference in net leases. Here are the five types and what they offer.

1. Single Net Lease Property

Single net or “net lease” property leases state that the tenant is responsible for net property taxes in addition to base rent. The tenant pays taxes through the landlord, ensuring taxes are paid on time and in full. The landlord is still responsible for all maintenance and operating expenses, capital expenditures, common areas, structure, and so on.

2. Double Net or Net Net Lease (NN)

Net net (NN) or double net lease properties are the most common type of commercial lease. In a NN lease, the tenant pays monthly base rent plus net property taxes and net insurance to the landlord. The property owner is responsible for the maintenance, structure, capital expenditures, management, and other operating expenses.

However, some NN leases also divide the maintenance costs between the owner and the tenant. This is done mostly by assigning the costs of inside maintenance and repair to the tenant, with the owner agreeing to pay for the roof and structural maintenance. This would be considered a “modified double net lease.” These arrangements are also common with triple net lease properties.

3. Triple Net or Net Net Net Lease (NNN)

In a triple net lease (NNN) property, the tenant agrees to pay operating expenses, net taxes, insurance, and common area maintenance, as well as other fixed and variable expenses. In some cases, the tenant will also agree to pay for capital expenditures, i.e., roof repairs or the replacement of larger equipment, such as an HVAC system. If the tenant is a major corporation or a high-credit tenant, such as Dollar General or Taco Bell, they often want full control over their brand, and will therefore pay all expenses and operate with an absolute NNN lease. 

4. Absolute Triple Net Lease

Absolute triple net leases are often called “hell or high water” leases. Here, the tenant guarantees to pay all expenses and take every possible real estate risk, providing total financial and lifestyle freedom to the landlord. For example, if a hurricane knocked out the ability to do business or ruined the structure, an absolute triple net lease would require the tenant to pay for rebuilding while continuing to pay rent. If a building were to be declared inhabitable and scheduled for demolition, the tenant would be required to pay the rent for the lease term. This is considered a lease “guarantee.”

Why would a company agree to this? Most major brands that utilize absolute NNN lease agreements do so because they don’t want to own properties and tie up capital but they want full control over each property as if it belonged to the company. They also expect the common area maintenance, structure, and inside condition of the building to reflect their brand. Rent is typically lower than other lease types, and since there is minimal risk to the landlord, cap rates also tend to be lower.

Triple net property investments are more popular than ever. They have a low barrier to entry, they are easy to own with reliable monthly income, and they offer economic stability few other investments can offer. 

5. Modified Net Lease

A modified net lease goes by many names because any modification to an absolute triple net lease, single net lease, or double net lease now becomes a “modified” version of the standard lease. It is very common for certain corporations to operate with modified absolute NNNs or double net leases, where the lease requires the landlord to pay for one or two things that wouldn’t normally be in the standard lease. Dollar General, for example, requires the landlord to pay for roof, structure, and parking lot maintenance for stores built before 2012, but not newer stores, which operate with absolute NNN leases.

Triple net property collage with diff asset types

What Kind of Properties are Triple Net Properties?

New NNN properties are usually built by developers hired by the corporation to build their next location. They are sold by the developer to a buyer who then agrees to the corporation’s standardizes triple net lease agreement (usually non-negotiable), which will usually be for ten to fifteen years. There are also existing triple net properties that are bought and sold just like any other type of real estate, except that the lease will be adopted with the remaining years and terms in place (it doesn’t start over).

Triple net lease properties are typically businesses tied to lifestyle trends and necessity versus those tied solely to economic cycles, such as dollar stores, fast food, medical clinics, early learning centers, and convenience stores and gas stations. Most are recession-proof and now we know they are pandemic-proof as well.

Triple Net Examples

These property types also commonly fit the three most important NNN investing criteria – tenant creditworthiness, high-quality location, lease type and duration – and have proven, even in the toughest economic times, their ability to stay profitable.

What is the average cap rate for most NNN investments? 4.5–6.5% in 2022. For more FAQs, be sure to [click here] go to our Frequently Asked Questions page.

Businessman and customer are in consultation

Who Can Buy Triple Net Leases For Sale?

Triple net lease properties are ideal investments for all ages and professions. As long as you have a minimum net worth of $1.5 million and a 30–40% down payment, you are a candidate to buy a triple net for sale.

  • Doctors, attorneys, engineers, software developers, and other professionals buy NNNs to build wealth while they work, without landlord hassles, so they can retire early.
  • More and more commercial real estate investors are purchasing triple nets over gross lease properties due to their stability and hands-off nature.
  • Stock market investors and retirees who want investments that are not subject to wild swings in value also purchase triple net properties.

Additionally, the convenience of triple net lease properties is doubly appealing when one considers the difficulty of leaving a high-maintenance, costly apartment building or office block to heirs.

Whatever stage in life you find yourself in, if a reliable, growth-based, guaranteed monthly income with little to no property responsibility and very low risk sounds favorable – investing in triple net leases may be for you.

What do NNNs Cost?

The average NNN investment costs between $1.5 and $2.5 million. Some can go as high as $10 million and some for less than one million dollars. Here are a few typical examples:

  • Dollar General: $1–2 million
  • Walgreens: $4–7 million
  • Gas station/Convenience stores: $2–4 million
  • Fast food/QSRs: $1–3 million
  • Early Learning/child care: $1.5–8 million

Why Purchase Triple Net Lease Properties?

Triple Net Pros

Triple net properties house major brand tenants from billion-dollar corporations, such as Dollar General, Walgreens, and Starbucks.  Because these are investment-grade tenants, they are significantly less likely to default, reducing owner risk. 

Triple net lease properties offer a predictable overall return with periodic rent escalations and little or no management responsibilities, guaranteed monthly income –potentially for decades – and the ability to diversify between asset type, location, tenant, and lease type.

In the end, with the tax opportunities, rent escalations, possible leverage, the value of the tangible asset, and financing terms, your internal rate of return (IRR) can be as much as 7–10% or more, which is in-line with gross lease investments and stock market returns.

Triple Net Cons

Unless you are someone who enjoys hands-on property management, there really aren’t any triple net cons. It can also be said that NNNs don’t offer the rate of growth of other investments, like stocks and bonds, however, when inflation, daily fluctuations, and tax opportunities are taken into consideration, the internal rate of return has the potential to be the same.

How do I Buy a NNN Property?

Triple net lease property demand is high, and many never make it in the open market, which is why engaging a Westwood Net Lease Advisor to help – at no cost to you – may be the only way to purchase your ideal property.

Many sellers do not advertise their properties for sale, preferring to share information with a small group of brokers with whom they have built a relationship over the years. Through this network of sellers and developers, we are able to tap into this stream of quality NNN properties, allowing you access to deals that never become public.

If you meet the financial requirements, to get started with the process and find out which investment type is right for you, all you have to do is call or contact us and we do the rest.

Sealing a deal, Business man and woman handshake to business agreement.

To Wrap it Up – What is a Triple Net Lease?

A triple net lease is a lease with very little or no landlord responsibilities, which translates to financial freedom. For all the reasons shared earlier, NNNs are one of the safest, most reliable real estate investments one can make. There is very little downside and plenty of benefits.

From before the property search through closing and thereafter, the Westwood Net Lease Advisors team is your personal representative working to ensure you get your ideal real estate investment. We help you understand the process and take advantage of all the tax opportunities available, like the 1031 exchange and cost segregation depreciation, and get you to the closing table on time with confidence. Contact us today for a no-obligation, free conversation. 314-997-5227


 

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