What is an Triple Net Lease (NNN) and why Do You Want One?

What is Triple Net Lease?

What is a triple net rental? Triple net (NNN) lease is a lease arrangement that allows the tenant to pay all the operating expenses of the building. This means they take care of the insurance for building, property as well as real estate taxes in addition to of the rent. In addition, they manage the maintenance costs for the house.

In general, it is thought as a turn-key investment as the landlord isn’t accountable for taxes on the property and insurance costs. But, you should be aware that there are a variety of residential real estate leases there, such as one-net lease. In this case the tenant has to pay rent and property taxes only.

Commercial Real Estate Leases

Each commercial real estate lease is a different kind of lease, including an absolute lease on one end, and the absolute gross lease at the other. The majority of leases fall between and are known as hybrid leases.

The triple net lease is usually considered to be an unambiguous version. The fact that it’s labeled as triple lease doesn’t necessarily mean that it includes everything. Sometimes, it’s labeled that way to facilitate.

In the case of the building is newly constructed, the tenants may be accountable for replacing the building. On older structures it is possible to call it triple net, however the landlord has to take care of the costs.

Sometime, people consider triple nets as double net lease that obliges tenants to cover taxes on property and insurance (including building insurance) and also an initial rent.

The most important thing to remember here is to understand the lease. It is essential for tenants to do know the clauses. Simple labels don’t suffice.

What Leases with NNN Don’t

Even if it’s an absolute lease, it cannot cover every expense that comes in the business property. While a genuine absolute net lease that has a reliable tenant is considered to be a turnkey investment from an landlord’s or investor’s viewpoint however, they can also include expenses that tenants aren’t accountable for.

It’s for instance, rare for an NNN lease to cover the accounting expenses incurred by the owner’s CPA or any other legal costs. Although they’re not much when compared to the cost of purchase but they’re not included in the monthly price the tenant has to pay under this NNN lease.

Triple Net Lease Investment Risks

One of the most common misconceptions about triple net lease investment is that they’re safe. While they have many advantages however, there are some the potential risks to be considered. The main advantage for triple net leases lies in the fact they provide the potential for a predictable revenue stream over the long term with pass-throughs in place. In general, you’ll have less trouble and minimal administration requirements.

While they have many advantages however, a triple net lease doesn’t come with a guarantee of safety. Because the majority of these leases are single-properties, the credit risk of tenants must be recognized. For instance, you might not have any doubt about a lease secured by a parent company since it is financially sound and is publicly traded. However, the tenant may be unable to maintain its status and become bankrupt, since there is no guarantee that everything will be perfect. Because a single-tenant home is vacant, or not it is a good idea to think about this.

Another possibility is leasing again. A lot of triple-net properties will be sold after the expiration of the lease, shifting the responsibility of leasing onto the owner who is buying the property. There is a possibility of issues when it comes to tenant rollovers in the event that they do not have a solid team in place to deal with the situation.

Evaluation of the Tenant Credit Risk

One important aspect to focus on when looking at your investment property is the credit risk that the tenant is taking on. Triple net leases are as solid as the tenant. Therefore, it is recommended to study financial statements from the opposite aspect of the NNN lease.

A lot of single-tenant agreements include large, publicly-traded corporations. It’s simple to look up their credit scores. However, private businesses require greater effort to complete their credit analysis. However, you must examine your financial statement and patterns to know whether this is the best tenant.

NNN Lease with Property Taxes and NNN Lease

Here’s the triple net lease example which demonstrates how it’s constructed. When you look at the cash flow for an investment property and notice that there are no expenses reimbursements due to the tenant. So, you conclude that they’re an absolute gross lease. Therefore, the landlord is responsible for the operating costs of the building. This includes maintenance expenses as well as the rest.

But, if the tenant is able to pay all operating costs and taxes the situation will change. If there is the NNN contract in effect, there’s more reimbursement income that will offset the operating costs. To be honest it is generally less then the net lease for the identical property. So, the overall cash flow for the lease is typically more similar to the net lease.

The main thing that the NNN lease does is create shifting the responsibility of the landlord. Thus, the responsibility for continuing expenses shifts from the landlord’s to the tenant. In the present, the tenant is the one who is responsible for paying. For instance, if property taxes rise each year at a substantial rate and the landlord’s bottom line is protected by the three net leases. The tenant is responsible for the increase in cost.

The main thing to consider is on what the base rent will be, and it is typically determined based on square-foot amount. Also, you must take a look at the capital costs including maintenance, taxes, insurance and the rest. Then, you’ll be able to decide if the lease is reasonable and an appropriate investment option for you.

Many landlords favor double net leases, which means that the tenant is accountable to pay for insurance for the property and maintenance, in addition to the rental base amount.

Single vs. Double. Triple Net Leases: What’s the difference?

Single Net Leases

One-time net leases frequently referred to as net lease and also an “N” lease they aren’t as prevalent in the rental market. In a lease such as this the landlord is transferring some risk to the tenant, who is responsible for fees for property. Any other expenses, such as insurance repairs, maintenance, and utility bills are the landlord’s responsibility. Additionally, the landlord will be accountable for any repairs or maintenance required during the term of lease for the property.

Tenants who are on one net lease will end with a slightly lower rental than those who lease a conventional one due to the increased tax burden for property tax. However, a higher rent isn’t a way to relieve the landlord’s obligation to keep these costs up-to-date.

Double Net Leases

The double net leases, often referred to as ultimately leases (also known as “NN”), are very used in commercial property. In a lease such as this the tenant is responsible for insurance premiums and taxes as well as the rental. The rent base, which is to be paid for the property itself is typically lower due to the additional costs the tenant has to bear. The maintenance expenses however are the charge of the landlord who is the one to pay for the expenses directly.

In large commercial developments that have more than one space for rent, like malls, as well as large office buildings, tenants might have different square footages than their neighbors. Therefore, landlords usually allocate insurance and taxes to tenants in proportional amounts based on the size of the space they lease.

Like the one-net lease landlords must have these extra payments transferred to them, so that they could pay them to the local government and insurance company. While the tenant’s lease contains these fees, the landlord’s name is on the tax and insurance bills and is therefore accountable. In the event that the tenant is required to pay these costs directly to the landlord, they are able to avoid the issues associated with missed or late payments made by tenants that can result in additional charges.

Triple Net Leases

Triple net leasing relieves the landlord from the greatest risk associated with any lease. That means that even the cost of repairs and maintenance have to be paid by the tenant in addition to the rent as well as property taxes and insurance costs. Since these costs are passed onto tenants, landlords typically is able to charge a lower base rent.

If maintenance costs are higher than anticipated, tenants with triple net leases often attempt to end their leases or get rent concessions. To stop this from occurring, many landlords choose to use bonds on their net leases. This kind of net lease with triple terms can be terminated before its expiration date. In addition the rent amount can’t be altered at any time for any reason, including sudden and substantial increase in the cost of ancillary services.

Landlords might prefer using an option to bond their net lease since tenants could try to negotiate out of a high-cost triple net lease.

Triple net leases could raise the renter’s operating costs and put them in the position of paying insurance deductibles. They may also be liable for any damage to the property which isn’t protected from the insurer.

The majority of Triple net leases tend to be leases for longer than 10 years. In addition, they typically contain concessions for increases in rent.

Key Takeaways

  • Net leases are real estate lease where the tenant is responsible for an additional expense or two.
  • The tenant pays a lower base rate and property taxes in a single lease.
  • Double net leases cover insurance and property taxes in addition to the base rent.
  • The triple net rental covers property taxes along with insurance and maintenance expenses, in addition to the base rental.
  • Tenants might try to opt-out of an agreement that is triple net due to the high cost associated with them, and landlords usually opt for bonds to secure a net lease.

Watch Now: What is the Triple Net Lease (NNN)?

Triple Net Leases The pros and cons

Triple net leases provide tenants and investors advantages. However, there are a few limitations with this type of commercial lease, which each party must think about before signing long-term triple net lease contract. While tenants in triple net leases are required to accept more financial responsibility than other lease types but they are also beneficial to tenants in a variety of ways.

Advantages of Triple Net Leases

The triple net lease is an arrangement between a property owner as well as an individual tenant in which the tenant is responsible for paying property fees, taxes on insurance and maintenance and repairs as well as an annual rental fee for the property or the space.

LONG-TERM OCCUPANCY

The majority of three-net leases are designed to provide long-term tenant occupancy (upwards of twenty years). This is beneficial for landlords as it eliminates the risk and potential loss of the property being vacant between tenants.

Low-Risk Investment

The tenant is responsible for almost all costs related to the property, from taxes and insurance to the regular maintenance expenses, a triple net lease is an investment that is relatively low risk for investors.

A Consistent Income stream

The triple net lease could be a reliable source of earnings for investors. The lease is designed to provide an amount that is consistent every month for a long time. Additionally most of the unplanned or unavoidable property costs are transferred to the tenant, thereby helping ensure the security of the investment.

Create Equity

Three net lease homes are typically added to portfolios of investment as a prudent, low-risk method to generate more equity. In addition, investors can opt to let the home go at the market gets crowded, the people are soaring, or they’re ready to apply the equity to make future investments.

Lower Duties of the Landlord Duties

With the triple net lease you do not have the same obligations as landlords with a more traditional lease. In addition, with more time and more money, the investor is able to pursue different ventures.

long-term business footprint

Tenants who sign up to an extended lease enjoy the advantage of having the ability to build an established and long-lasting space for their company.

Location

The majority of properties that have triple net leases will be situated in areas that are accessible and near to other businesses that are popular. This could help tenants get exposure and traffic from those who frequent other businesses located nearby.

Tax Benefits

As tenants who lease a triple net are accountable for the payment of tax on property, they might be able to include these costs in their expenses for business and gain some tax advantages for their company.

The Cons and Negatives of Triple Net Leases

Earning Caps

If landlords are stuck in a lease for a long time and are not able to increase rent when the property’s value in the region increase. In the long run this could limit the earnings potential.

Risks for Vacancy and Costs for Rollovers

It is possible to run the possibility that a tenant could default, even if it an extended lease, and the tenants are thoroughly scrutinized. In the time they try to fill the vacancy, investors could suffer losses.

Assuming that property expenses are included

When a triple net lease is signed that the tenant takes on the responsibility for the upkeep and operations of the office. Alongside the (sometimes) expensive expenses associated with operating their company, tenants should be prepared to fund the operation of the building as well as any additional expenses that arise from it. This could be a significant cost, and tenants should have a good credit history in order to be eligible for an ad-hoc three-net lease.

Pros and Cons of a Triple Net Lease

Caps on earnings

Vacancy risks

Assuming the property’s expenses

Tax obligations

Triple Net Lease Example

Many multinational corporations who want uniformity of their brand choose triple net leases. Walgreens is an instance of a business that often agrees to Triple net lease contracts. In the year 2019, Walgreens was the second-largest U.S. pharmacy by total prescription revenue. 1 Walgreens specialises in prescription medications and the convenience of shopping online for everyday goods. Walgreens chooses to sign the 25-year triple net lease.

If a company chooses to sign the triple net lease, they release the landlord from any responsibility physical or financial of any kind. They manage their own maintenance, utilize their own suppliers, buy signs for their premises, and pay for operating costs, and capital expenses. By committing on a triple-net lease, Walgreens can have its choice of the best retail locations. Walgreens stores are usually located in great locations–1.5-acre areas at major intersections in the major retail areas.

Walgreens looks for these locations to ensure best visibility. Walgreens is to be a top tenant in the world of triple net leases. It is also an investment that is safe to investors. 2

Extra Considerations

When signing any kind contract, the tenant has to be aware that the rent they pay may be increased, regardless of whether they contain notes or other expenses can be increased. The landlord could increase the rent due to legal increases that are permitted by local government authorities. However, the rent could be increased due to tax assessments on property or an increase in insurance rates.

There are options. If offered the choice the tenant may look into signing a lease that is gross, that charges a fixed rental cost. This sum covers the rent for the property, and any other charges that accompany it. The landlord is responsible for the payment of the property tax, premiums for insurance and maintenance expenses. They pay for these expenses by incorporating them into the rental they charge their tenants.

For example, if their annual rent is $10,000 and they calculate the additional cost to be $3,000, then the effective rent they pay to the tenant will be $13,300 per year. While traditional leases are much more popular than net leases, they are more risky for the landlord who has to take on any sudden increases in additional expenses. This is the reason why some landlords choose to use net leases in the form of a kind which shifts a portion or all of the risk onto the tenant.

Modified gross leases are an alternative to net lease. When a modified lease is in place that the tenant pays an initial rent amount at beginning. In time the lease will take on the proportional portion of the additional costs that come to the property including property taxes and utilities, insurance and maintenance.

Triple Net Lease FAQs

Do you think a triple net lease is is a good idea?

Both landlords and tenants triple net leases provide some advantages. Tenants have more flexibility in their arrangement and can personalize their space to create consistency in branding without the cost of a purchase. Another benefit is that triple net leases are generally flexible, with caps on taxes, increases in insurance as well as other increases. For landlords triple net leases could provide a steady source of income, and they have minimal expenses. The landlord does not need to play a significant position in the running of their property.

What is the difference between a Triple and a Net the Net Lease?

Net leases are an arrangement in which the tenant is responsible for a percentage or all the taxes, insurance charges as well as maintenance costs for the property in addition to the base rent. Net leases are typically used to lease commercial property. There are three kinds of net leases that include single net leases, double net leases or triple leases. If tenants sign an individual net lease, they are required to pay one of three categories of expense that include taxes, maintenance, and insurance charges. If tenants sign an agreement to sign a double net lease, they are required to pay for only two of these three categories of expense. They are also known as net-net leases. When tenants sign an agreement for a triple net lease they will be responsible for the three categories of expenses. Triple net leases can also be called a net-net-net lease.

Can you negotiate the terms of a triple net lease?

When you lease a triple net the majority of the responsibilities fall onto the landlord. The tenant is accountable for the payment of rent along with all the cost of ownership for the property, including taxes and insurance, operating costs and utilities, among others. This means that the rental amount that is the basis of the lease can be a significant negotiation term. Because the tenant takes the risk of landlord’s expenses, they might be in a position to negotiate the base rent to a better amount. In some instances, tenants can negotiate which elements of repairs and/or utilities the landlord will be accountable in. 3

How do you calculate the Net Lease of a Triple Net?

There are many ways the total amount of a triple net lease may be determined. Sometimes, landlords add up all property taxes and insurance costs, maintenance and common area costs for a property and then divide that sum by 12. This figure is the monthly price. This is a simplified process in the case of only one tenant leasing the building. The base monthly rental is normally calculated on an amount per square foot. 4

What is the Landlord’s Responsibility in the case of a triple net lease?

The tenant is accountable for the bulk of the expenses associated with commercial properties that have an equivalence of Triple net lease. However, the landlord might be accountable for the roof and structure, and occasionally the parking area. 5

Conclusion

Net leases are one type of real estate lease – typically for commercial rental properties – in which the tenant is required to pay some or all of the additional costs. There are three main kinds of net leases which are single, double as well as triple net leases. In triple net leases, the tenant agrees to cover all expenses of the property, which includes taxes on real estate, building insurance and maintenance. These charges include costs for utilities and rent. Triple net leases often have a lower base cost because the tenant is responsible for more of the cost of the property. Net leases are often similar to step-up leases and ground leases.

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