Triple Net Lease or NNN lease is a lease where it is the tenant instead of the landlord who pays maintenance, insurance as well as property tax besides the usual rent. The lessee assumes all operational expenses of a property. It includes variable and fixed expenses along with the cost of own occupancy and even maintenance for any common area that might apply to the property.
The landlord is only responsible for any structural repairs.
What is a triple net lease or NNN lease?
NNN lease is one of the most popular types of a net lease that is used for retail space or commercial freestanding buildings. This real-estate lease is described as a rental agreement between the landlord and the lessee where the obligation of paying operating expenses is transferred from the former to the latter.
It is considered to favor the landlord more than the tenant and it is important to view the contract and negotiate a cap that is raised annually. The lease tends to fluctuate considerably and is dependent on the increase and decrease of operating expenses.
Examples of triple net lease
Ramesh is the owner of a bookstore and he is longer interested in it because of ill-health. He decides to lease his property instead of just renting it to a neighbor because he does want to deal with the hassle of maintenance and tenants.
This will free him of any operational and maintenance expenses. The contract is drawn up and Ramesh now receives a fixed payment every month without thinking about all the nitty-gritty details. It is the neighbor who now has to pay insurance, maintenance, taxes, and rent on the property.
Characteristics of Net Lease
The properties are considered solid investment opportunities for retires and professionals. Some of the important characteristics are as follows-
- Triple net lease is more often used for freestanding commercial buildings and retail buildings like banks, office buildings, shopping malls, industrial parks, restaurant chains, fast-food restaurants, gas stations, convenience stores, grocery stores, government entities, and pharmacies
- It is the lessee who is responsible for property expenses like property insurance, taxes, maintenance, utilities, and rent
- It is the responsibility of the lessee of a triple net lease property to pay for repairing and maintaining costs of upkeep, exterior walls, and roof
- Triple net lease does not cover accounting costs or legal costs charged by the landlord’s CPA and attorney respectively during drafting or reviewing of documents
- Some operational expenses on the triple net lease properties that can be negotiated between a landlord and lessee are expenses related to the parking lot, inspection fees, broker fees, landscaping, security services, real-estate commissions, and management fees
- Properties with a triple net lease are considered good investments for investors as it offers a steady source of income but at a lower risk
- The triple net lease has a lower rent as it is the lessee who is now responsible for ongoing expenses
- It is a straightforward concept and makes it easy to own and operate properties
- An important characteristic of a triple net lease is that it is flexible by nature and offers a stable income
The advantages are as follows
Get the rewards without risk – Properties are considered one of the most secure investments as it guarantees predictable and steady income over a long period of time. As lessee is more than often a part of the franchise the deal is considered financially stable with lower risk factor
1. Low-risk investment
As the tenant absorbs most of the costs associated with the property it proves low-risk investment for the landlord
2. Reliable and steady income
A triple net lease is structured in such a way that it offers consistent rent every month for a longer time period.
The properties are added in the portfolio of an investor to create more equity. They hang on to the property for a few years and sell it at peak period
4. Profits get accrued via tax deferments
If the investment property is appreciating and you decide to sell it then it is possible to avoid tax payment on your gains by making an investment of that gain into another property. It will enable an investor to invest in larger properties and accumulate wealth without paying taxes every time a profit is made.
5. Freedom from managerial obligations
The most important advantage is that it offers the landlord freedom from managerial obligations that are part of holding a property. It is the lessee who is responsible for the upkeep and any expense on that property
6. Property taxes
If there is an increase in property tax then it is passed to the lessee and not to the landlord.
7. Lower rent
As the lessee accepts a share of property expenses the landlord sets a low rent on the property
8. More freedom with the structure
A tenant has the option of making some changes in the structure of the lease property compared with a person renting without it as he does not have that option to do so
9. Property control
The lessee of a triple net lease property has more control of the property compared to other tenants as he can repair the roof or plumbing system in case of an emergency. The lessee will not have to wait on the ease and whim of the landlord to do so.
10. Good location and lasting footprint
Long-term lease offers an opportunity to the lessee to create a long-lasting location for their business. This helps them to have a viable footprint in the market. Moreover, this helps the lessee to gain constant exposure and frequent traffic to their business
11. Long-term occupancy
It guarantees tenant occupancy for the long-term and the landlord does not have to find a tenant again and again and that too within a short time period.
Moreover, the investor is saved from the risk and also the loss that a property might incur when it is between tenants.
12. The income figure is separate from the actual rent
The rental payment is kept separate from other costs and this allows the property owner to maintain his own accounting books and keep the income figure separate from the actual rent because of the basic nature.
13. Tax benefits
Although a lessee is responsible for property taxes, he can make sure that these costs are shown as business operating expenses and can gain tax benefits for his business through terms and conditions.
14. Property can be sold with the lease
Property owners can sell their properties even if they have a lease contract. It is a safety net for the landlord if the price of the property rises or there is a need to sell in case of financial difficulties.
The lessee does not have to worry in such a case as the lease on the property transfers from one person to another without any undue impact on his business. The new owner cannot evict a lessee and moreover, he will have to abide by the terms of the older contract.
The numerous disadvantages are as follows
1. Vacancy risks in the net lease
Although the triple net lease is generally drawn up for a longer time period there is always a risk of the tenant defaulting that can lead to filling the vacancy again and incurring a loss in rent.
2. Earning caps
It offers constant revenue but in case the property prices increase the investor faces a loss as he cannot hike the rent midway.
3. Assuming expenses related to property
It is the responsibility of the lessee to pay operational expenses and this case a serious dent in their profits.
4. Risk of unfixed cost
If the insurance or property taxes increase the operating expenses from a lessee’s viewpoint will also increase. Even sudden unexpected costs will prove .disadvantageous for him.
5. Negative publicity in lease
If the lessee suffers from a negative brand image or publicity it will also have an indirect impact on the landlord as he will become guilty by association and this can reduce his bargaining power.
6. Fall behind on tax
If a lessee falls behind on tax and insurance payments this increases the vulnerability of the landlord.
7. State of disarray
If the lessee does not take proper care of the property because it actually is not his, then it can fall in a state of disarray. This can lead to higher repair expenses which will have to be paid by the landlord when the lessee vacates the property.
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