Believe it or not investors are still confused over what a triple net lease is. People are even more confused of when it’s a smart investment. Although every investment is unique, there are several things that are common among successful triple net lease investments. Understanding what a triple net lease is key to understanding what makes it so successful.
What is Triple Net Lease and how it differs from other lease models?
Unlike gross leases or other net leases, a triple net (NNN) lease passes many expenses and responsibilities onto the tenant.
- Insurance: the tenant is responsible for maintaining the necessary property insurance for the investment.
- Maintenance: the tenant is also responsible for any property and maintenance costs in a triple net lease arrangement.
- Lease period: Triple Net Lease (NNN) aim at a long-term lease agreements
With NNN, the investor relinquishes insurance and maintenance control. This is why they need to be sure that the tenant understands the extent of the insurance that is required for the property. Tenants also need to understand the extent of any maintenance costs. A tenant who is too aggressive with his own capital may invest too much of his money into the property at once. This puts both his business and the investment at risk. An ideal tenant is a shrewd businessman. These people have plenty of capital on hand to deal with expenses.
NNN leases are not light agreements between the property owner and the tenant. Such deals require a lot of effort on the tenant’s part. This is why a short term lease of one or two years does not make sense for either party. A leasing agreement anywhere from 5-20 years does very little to secure your investment if the business model is unproven and will be bankrupt before your contract expires.
Triple Net Lease: Who is it for, and who should stay away from it?
With this understand of what a triple net is, a clear pattern emerges for the type of properties and tenants well suited for this arrangement:
- The tenant must be knowledgeable,
- have considerable investment capital of their own and,
- have a proven business model to eliminate the risks of the investment for both parties.
Commercial properties, especially franchises with a proven success rate such as pharmacies and fast-food restaurants are an ideal choice for triple net lease investments.
What is your next step?
Now that you are armed with a better understanding of what a triple net lease is, the next step is investigating your opportunities. For a free consultation and to learn more about leveraging Section 1031 in your investment portfolio, please call Chris Schellin, president of Westwood Net Lease Advisors at 314-563-2208, [email protected], or click here to use our contact form.