Triple net lease is a word tossed around a lot these days, by commercial real estate (CRE) professionals. If you’ve never heard the term—don’t worry. We’re going to take you through the ins and outs of triple net leases—also known as NNN leases—below.
What’s a Triple Net Lease?
There are various lease types in commercial real estate. For instance:
For this article, we’ll just cover triple net leases. Triple net leases are leases in which the tenant pays the operating expenses of the building for the duration of their lease, on top of the monthly rent payment. These types of lease agreements typically occur in a one-tenant building. A gross lease is a type of triple net lease in which all building-related expenses get bundled in one flat, base rent amount by the building’s single tenant.
Expenses incurred in a triple net lease include:
Triple net lease agreements are considered turnkey investments because the landlord/building owner isn’t responsible for these expenses. Contrary to what you might think, having a tenant take over the responsibilities of operational expenses is not just beneficial for the building owner—it’s actually a good thing for the tenant, too.
What You Should Know About a Triple Net Lease
People often throw around the term triple net lease when what they’re really thinking about is an absolute net lease. But labeling a lease as triple net, or NNN, doesn’t necessarily mean it’s an absolute net. For instance, a brand new building’s tenant might be responsible for replacing a roof or heating and cooling system as they wear out.
But if the building is older, it might have the triple net label applied when the property owner’s actually responsible for these expenses as the systems wear out.
A triple net lease is complex and multifaceted. The only real way to know every detail of its terms and conditions is to read every word. Simply labeling a standard lease triple net could actually conflict with the lease’s actual terms.
What Does a Triple Net Lease Include?
A tenant renting with a triple net lease is responsible for most of the property’s expenses. This includes such items as:
- Property tax
Because the tenant handles so many expenses on top of rent, their rent will often be lower than if they had leased a different way.
What is Not Included in a Triple Net Lease?
Depending on the wording of the lease, even an actual absolute net lease doesn’t cover every single expense that comes with a property. For instance, a tenant holding an absolute net lease doesn’t cover accounting or legal fees for the property owner, except in very rare cases; even though these costs are considered minor. That said, these rules can differ greatly between landlords and lease companies.
Real Estate Investment Benefits of a Triple Net Lease
Triple net leases are particularly advantageous for property owners. Landlords typically favor this structure for several reasons, which include:
- Revenue streams are more predictable
- Less management and oversight of maintenance issues
- Lower investment cost compared with multitenant buildings
- Better financing options based on asset value and tenant’s credit history
Basically, investors benefit more from a triple net lease property because of stable revenue, and low time and resource investment.
Investment Risks of a Triple Net Lease
While they sound great on paper, this type of lease agreement doesn’t mean there is no risk at all.
Most triple net leases are for one-tenant properties, meaning the success of the project rests on the creditworthiness of the tenant.
You wouldn’t doubt the credit strength of a strong, publicly traded single-tenant investment with a tenant like Walmart, for instance. But what if this tenant falls out of consumer favor during the lease term and goes bankrupt? The thing about a one-tenant, triple net property is this:
It’s either occupied or it’s vacant.
You should weigh even the slightest risk when entering into a triple net lease.
Most investment properties of this type get sold near the end of a lease. Triple net lease investments do this to shift re-leasing risk of potential rollover to a new owner. That said, most triple net leases are long term.
How to Assess Tenant Creditworthiness
A lease’s strength lies in that of its tenant’s credit history. You must analyze the financial statements of a potential tenant to understand your risk.
Most one-tenant triple net leases involve strong, popular companies that are usually publicly traded on a stock exchange. In this case, it’s easy to look into the company’s financial statements, business ratings, and other important information, like bond issue statements and stock reports from professional analysts.
For a privately held company, however, a thorough analysis is a bit trickier. It’s a good idea to brush up on your knowledge of financial statements and market trends, so you can understand exactly what’s at stake when weighing a triple net lease. Commercial real estate involves some hefty decision-making skills, but analyzing risks and taking the time to mitigate them keeps you informed and your investments worthwhile.
Finding Investment Properties for Triple Net Leases
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