Triple net leases are becoming the prevalent type among landlords in the real estate world today. Needless to say, most tenants are still skeptical of NNN properties because of the misconception that these leases are advantageous only to property investors.
However, besides landlords, NNN leases also provide certain benefits for tenants. We’ll highlight these advantages triple net leases offer lessees and property owners, while also providing some disadvantages they bring to these individuals.
But first, we’ll treat the differences between the two major lease types, before proving the category NNN investment properties fall under and explaining triple net leases as a whole.
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Gross Lease Vs Net Lease
- Gross Lease
A gross lease involves the landlord assuming complete responsibility for the majority of the property’s expenditures, except for the tenant’s own utilities and insurance. Most residential leases are gross leases, with some including heat and hot water as part of the fee.
- Net Lease
Net leases have three categories: single net, double net, and triple net leases.
In a net lease, a tenant is subject to three primary expenditures, namely: building taxes, insurance, and structural maintenance. For single net agreements, the renter has the option to choose to shoulder one of the aforementioned expenses. Whereas in a double net lease, the tenant is accountable for two of these costs. Lastly, in NNN leases, all three expenditures are handled by the lessee.
What Is a Triple Net Lease?
NNN stands for “net, net, net,” and refers to lease arrangements that are free of the landlord’s property taxes, insurance, and maintenance costs. In other words, tenants are responsible for all of these costs.
In practice, expenditures a renter is accountable for may vary, and the only way to be certain is to read the lease agreement itself. To truly comprehend the NNN lease, you must first understand the commercial real estate lease spectrum.
It’s often a misconception by most people to think of a triple net or NNN lease as an absolute net lease. However, just because a lease is referred to as a triple N lease doesn’t always imply that it’s an absolute net lease. For the sake of convenience, a lease is frequently referred to as a “triple net lease.” Thus it’s difficult to define triple net lease exactly because each person in different marketplaces might give it somewhat different interpretations.
For example, a tenant renting a brand new building may be liable for paying for replacements such as the roof or ventilation systems when they eventually wear out. However, in older buildings, a lease may be referred to as triple net, but actually, the landlord, rather than the tenant, is required to cover these capital expenses over time.
So, when working with commercial real estate leases, you must remember to read the lease carefully. You can only comprehend a lease’s terms and conditions if you read the lease terms. Inscriptions used by agents and property owners, such as triple net, full service, gross, or modified gross, may frequently contradict the lease’s real parameters.
Commercial real estate leases are either absolute net leases, gross leases, or somewhere between. A vast majority of these leases fall in the middle and are referred to as hybrid leases.
Absolute Net Leases
In reality, most absolute net leases aren’t triple net. An absolute net lease transfers all foreseeable expenses to tenants, even those for major repairs or maintenance difficulties that may simply be the result of a building’s aging. On the other hand, a triple net lease places certain restrictions on what the lessee must pay for.
Because of a fire or natural catastrophe, an absolute net lease arrangement may require a tenant to pay rent even if the building has been damaged or left unusable. However, even a truly absolute net lease doesn’t cover all conceivable expenditures. Accounting and legal fees that primarily benefit the landlord are often not passed on to the renter.
NNN leases Expenses
A triple net lease requires the renter to pay for all three primary expenditures in addition to rent, such as personal insurance costs, utilities, and house cleaning services.
Running costs and utilities related to the building are included in common area upkeep. When there are numerous tenants in a NNN property, the prices for the rented sections are often apportioned based on the percentage of the entire building they occupy. A renter occupying about 1000 square feet of a 10,000 square foot facility, for example, would be liable for only 10 percent of these expenditures.
Landlords may charge tenants every month, subsequently, after estimating these expenses. Alternatively, the renters can pay for these expenses as they incur them. Sometimes it’s a mix of both options. Property taxes and insurance are usually predictable. However, increases in maintenance or repair costs may come as a surprise. As a result, triple net leases can vary from month to month.
NNN Lease Expenses for Landlords
Even if you hold an actual absolute net lease, a widespread misunderstanding is that an absolute net lease covers all property expenditures, which isn’t necessarily the case. A landlord or investor might consider a genuine absolute NNN lease with a good tenant as a turnkey commercial property. However, even an absolute net lease involves several expenditures that the tenant will not cover.
For example, it’s uncommon for a triple net lease tenant to pay the landlord’s CPA’s accounting fees or the landlord’s attorneys’ legal fees while preparing or reviewing papers. Although these fees are usually trivial in comparison to the purchase price of NNN investment properties, they aren’t frequently covered by a regular triple N lease.
NNN Lease Investment Risks
It’s a prevalent misunderstanding that triple net lease investments are somewhat risk-free. While triple net investments have several benefits, they also come with several pitfalls that should be considered.
Because of the long-term leases and processes in place, NNN investments provide a dependable revenue stream, as well as a generally hassle-free investment due to the low management needs.
It’s likely for financially stable and publicly traded tenants to fall out of favor and go bankrupt during the lease period. This factor should be accounted for since single-tenant NNN properties are either 0 percent unoccupied or 100 percent vacant.
Another considerable risk is the possibility of re-leasing. Many triple net investment properties are sold after a longer lease, transferring the risk of re-leasing to a new owner. If the new owner lacks these abilities or a strong team to win a new lease, there is a significant danger of tenant rollover.
After considering these risks, you can acquire NNN properties for sale to begin your investment journey if you feel that it works for you.
Tenants’ Risks in a Triple Net Lease
Understanding the tenant’s credit risk is an important factor to consider when examining a NNN lease investment property. After all, a lease is only as solid as the tenant who signs it. Therefore assessing the financial accounts of the tenant on the opposite end of the triple N lease is crucial.
Credit research takes a little longer for private organizations but reviewing financial records and patterns to better understand credit risk is beneficial.
Benefits of NNN Leases
The most obvious advantage of a triple net lease to a tenant is a reduced base lease price point. A NNN lease has cheaper monthly rent than a gross lease since the tenant is responsible for at least some of the taxes, insurance, and maintenance costs.
During lease negotiations, tenants might exploit the specifics of a triple net lease as a source of power. Since the landlord would prefer renters with a proven track record of financial responsibility, you can use your creditworthiness as a negotiation weapon to get the base monthly rent even lower.
Triple net lease buildings with low vacancy rates are especially appealing to renters since the costs of taxes, insurance, and maintenance are shared by a larger number of tenants.
You pay a smaller allocated amount of the continuing expenditures while still paying a cheaper monthly base rent by spreading those expenses out among other lessees. For newer or well-maintained buildings, where continuing maintenance expenditures are often minimal and imply lower monthly costs for renters, a similar concept exists.
How Do Landlords Enjoy Triple Net Leases?
NNN investment properties give the landlord the benefit of avoiding having to pay for tenants who squander utilities or are abusive of their spaces, necessitating higher-than-average maintenance and repair expenditures. In this sort of lease, tenants must be extra cautious and keep track of their costs. The landlord is spared the inconvenience and expense of dealing with repairs caused by a tenant’s carelessness or abuse.
A single tenant net lease for sale is a fantastic investment for an investor because these leases are usually long-term, lasting ten years or more, which means the landlord won’t have to renew the lease or find a new renter as frequently.
These benefits encourage investors to jump on opportunities involving NNN leased properties for sale. However, certain other factors also affect these potential landlords’ decisions to acquire triple net lease property for sale. These factors include steering in real estate, investor’s capital, etcetera.
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Conclusion
It’s a common misconception that triple net leases favor only landlords. To some extent, this ideology is correct. However, tenants also stand to gain some benefits from this lease type.
With some disadvantages included, individuals looking to acquire NNN investment properties for sale must consider these risks first before investing capital. Tenants are also advised to thoroughly go through the lease contract to ensure they’re aware of any terms that may cause them inconveniences. These measures must be taken to avoid future regrets.