Real estate with a triple net lease provides both investors and renters with a variety of exceptional opportunities and advantages. It’s been a premier passive investment channel for many investors seeking big gains in commercial real estate. Still, it also has certain features worth considering before choosing whether a triple net lease would be the best way to achieve your objectives.
Knowing the many types of net lease agreements prevalent in the market is useful for understanding the advantages and disadvantages of triple net leases. In this article, we’ll outline the distinctions between the various net lease kinds to help you better understand the triple net lease pros and cons, and develop your own customized list of benefits and drawbacks based on what most investors (and renters) find beneficial about triple net leases.
What is a Triple-net Lease?
Triple net leases, commonly referred to as NNN leases, is a lease structure where the tenant is responsible for property costs usually assigned to the landlord. Property taxes, maintenance fees, and insurance premiums are some of these charges. The tenant is liable for almost all of the property’s operational expenditures because these costs are paid in addition to the rent and utilities.
This leasing arrangement differs significantly from what is commonly seen in a regular lease agreement, where the landowner is liable for the majority if not all, of such costs.
These are the operational charges included in a NNN lease in its formal form:
- Property taxes
- Property protection
- Operational costs (also known as shared area upkeep costs)
The running costs could be anything from maintenance to snow removal and gardening. Depending on the kind of building and the particular lease arrangement in effect, these net expenses may vary.
The basic lease and the NNN fee are paid to the landlord by the lessee under a NNN lease.
Types of Net Leases
By understanding the many forms of net leasing agreements, you can confidently select the best option to support your investments and produce long-term performance in your portfolio.
Single Net Lease
In a single net lease, the tenants are in charge of paying the building’s property taxes in addition to the agreed-upon monthly rent amount. The single net lease is the least common arrangement in net lease property investment.
A single net lease transforms the owner into a landlord who is responsible for all costs and upkeep on their investment. In addition, although the renter is responsible for paying the yearly real estate taxes, the owner normally collects and sends the money themselves to guarantee accurate, timely payment.
Double Net Leases
In a double net lease, a tenant and a property owner agree that, in addition to the regular rent, the renter must also pay:
- Real estate taxes.
- Property claims and insurance premiums.
The owner of the property assumes the role of a landowner and is in charge of paying for any necessary repairs and maintenance to keep the building in good working order.
NNN Lease or Triple Net
An NNN lease, commonly referred to as a triple net lease, is a contract between an owner of the property and a tenant wherein the renter (in addition to paying the building’s or space’s monthly rental price) assumes all of the expenditures and liabilities for the asset, including:
- Real estate taxes.
- Insurance deductibles.
- Repairs, upkeep, and maintenance.
Absolute NNN Lease
The term “absolute NNN lease,” also known as a “bondable lease,” refers to a contract between a landlord and tenant in which the renter is obligated to pay both the building’s monthly rent and all other associated costs. Absolute NNN leases require the following from the tenant:
- Insurance deductibles.
- Real estate taxes.
- Maintenance and repairs of buildings (Including the Roof and Structure).
The most significant difference between an absolute NNN lease and a triple net lease is in structural and roof maintenance. These kinds of maintenance are usually specified as being the whole or partial obligation of the landowner in a triple-net lease. Whereas under an absolute NNN lease, the tenant is liable for all costs associated with the property, including those related to the building’s structure and roof.
Pros of Triple Net Lease
So let’s take a look at the specific triple net lease pros and cons. The main advantage of triple net leasing is the fact that the tenant is in charge of the regular maintenance of the building. As a result, the property owner has little to no management duties, giving them plenty of time to engage in other important aspects of their lives or explore other investments. However, this isn’t the only advantage.
High-Quality Renters Means Reliable Income Streams
Although tenant quality might vary depending on the contract, triple-net leased facilities often have high caliber and/or credit-rating, commercially-backed tenants like Walmart or Starbucks. Due to the decreased chance of lease default, the lease payments will provide a steady source of revenue over the long term.
Extended Occupancy
Although every triple-net lease is different, they often have long lease terms. Sometimes, they might stand for 25 years or longer. Therefore, landlords have greater certainty that the renter is dedicated to a place for the long haul.
Transfer of Lease Upon Sale
Real estate investors love triple-net leased buildings, so they are regularly acquired and sold. Thankfully, the triple lease agreement endures a sale, allowing it to be passed on to the next owner who will benefit from the lease payments.
Create Equity
The property’s monthly principal and interest mortgage payments are covered in part by the triple-net lease payments. The principal balance of the loan is decreased with each payment, increasing the property owner’s equity. When sold, this equity is realized, and the investor may make a sizable profit.
NNN lease properties can create a world of opportunities for investors seeking predictable cash flow and long-term financial security through commercial real estate. If you’re interested in learning more about how you can achieve high returns with minimal effort, chat with NNN Deal Finder today. We have a selection of profitable properties with strong, commercially-backed necessity retail tenants.
The Stream of Rental Income is Distinct From the Stream of Expense Reimbursement
The basic rent is paid by the renter independently from the payments for reimbursement of expenses. Accounting-wise, this model makes it simple to track the various income sources individually and to compare the money from expenditure reimbursement to the actual costs incurred.
A move can be made to recoup the whole cost, for instance, if a property owner receives $100,000 in expenditure reimbursements for the insurance policy, but the real insurance bill is $125,000.
Protection Against Increases in Operating Costs
Because running expenditures in a triple net lease are passed on to the tenant, owners are shielded from rising operating costs. This means that the profitability of real estate investments is unaffected if there is an unanticipated increase in real estate taxes or insurance costs.
Increase in Rent
Furthermore, triple-net lease arrangements sometimes require progressive periodic rent hikes. For instance, the contract can specify that rent increases by 3% yearly. By increasing over time, the rental revenue stream also rises for investors, which raises profits.
Despite the fact that these advantages are substantial, there are certain drawbacks that property investors must also take into account.
The Power to Audit is Shared by Both Parties
It is necessary to highlight that renters under a triple net lease do not directly reimburse vendors for their costs incurred. They pay the landowner back for them. They therefore depend on the owner of the property to disclose the costs associated with each line item. Each party is entitled to compare the money billed to the renter with the actual expenses to make sure that the correct costs are being covered.
Cons of Triple Net Lease
Liability
The most typical locations for triple-net leases are office buildings and retail stores, both of which frequently see high levels of foot and pedestrian traffic. Due to this, the property owner may be held liable for any injuries or unanticipated events. Although this danger can be decreased with insurance, it cannot be completely eliminated.
Limited Potential
Triple-net leased buildings are highly attractive commercial property investment vehicles, and there may be a fierce rivalry among investors for the finest ones, particularly those with credit tenants. They can be pricey as a result. A lot of the financial advantages are already factored into the lease structure, so the added potential is relatively constrained.
Maintenance Fees for a Triple-net Lease
The reconciling of expenditure reimbursement revenue to actual spending results in certain administrative overhead for operating a triple-net leased property. A gross lease is paid in one single payment, though when you factor in the various expenses covered by the tenant in a triple-net structure, the landlord needs to reconcile several payments.
Rollover and Vacancy Costs
There is just one tenant on certain triple-net leased buildings. If this tenant chooses not to extend their contract, the property will go from being fully occupied to being completely empty the moment they go. Additionally, the interiors of such homes with a single tenant are frequently custom-built and can be quite expensive for a new tenant to adapt at their expense.
Price Discrepancies During Negotiations
Every investor in real estate views risk differently, and every market has its own set of costs. They can be difficult to appraise when these elements are paired with the rivalry for buildings with these kinds of leases. Due to this, price discrepancies between what a bidder is ready to pay and the amount the seller wants is common, which could make negotiations challenging.
Is a Triple-net Lease a Wise Decision?
Triple net leases provide a world of opportunities and advantages for both tenants and landlords. A renter has more control over their building; they may alter it to better reflect their brand without having to make a purchase. These leases’ propensity for flexibility—including limits on tax and insurance increases—is another benefit.
Triple net leases for landlords can produce a dependable income with little overhead expenses. Additionally, the landlord is not required to actively take part in the administration of the asset.
NNN Deal Finder helps match investors with well-located, commercially-backed triple net properties that bring predictable cash flow and provide financial security for the future. Contact NNN Deal Finder today to find the best NNN lease deal for yourself!