Triple net properties, sometimes called NNN, are a form of commercial real estate. Those considering the investment in these properties should understand what this term means and how it applies to their situation.
What Does Triple Net Mean in Commercial Real Estate?
A triple net lease is a type of commercial lease that includes a provision that the lease remains responsible for covering some of the costs related to the operation of the property. These are additional costs on top of the rental fee paid by the tenant.
This means that, though the tenant writes a single check to the property owner or management company each month, some of that payment goes to cover other costs above and beyond what the base rent is. In triple net properties, the following additional costs are associated with the lease. The tenants pay a base rent and then also pay:
- Property Taxes: Taxes associated with the property itself, such as at the county level
- Insurance: Coverage for the property in all forms, such as liability, property insurance, and so on, and not just for the business that may be operating within or renter’s insurance
- Operating Expenses: This could include a wide range of costs associated with the property, such as utilities
In some situations, this is the ideal situation for the property investor because it reduces the amount of money the property owner pays out-of-pocket to manage the property. It is more costly to the tenant of the property, but in many situations, it is a cost of doing business and expected. In many ways, the more responsibilities the tenant has, the less risk there is to the property owner or landlord because those costs are paid.
What Are Other Net Leases?
- Single Net Leases: A single net lease is not as common as a triple net lease. This type of lease occurs when the property owner or landlord transfers just a minimal amount of risk to the tenant. In most cases, in a single net lease, the tenant pays the rent base amount and property taxes but nothing else.
- Double Net Leases: A double net lease is a step up and implies the tenant will pay two of the three obligations. This type of lease is more common than single net leases and frequently used. In this situation, the property landlord passes more risk to the tenant.
This often means the tenant pays the base rent required along with property taxes and insurance premiums in addition to this. In this situation, the landlord is still required to maintain the property, such as paying for utilities and all upgrades or maintenance to the property. Those are paid directly by the property owner.
- Bondable Lease: A bondable lease is a type of sub-variant to a single net lease. Most often used for long-term tenants of over 10 years, this type of lease involves the property owner and the tenant sharing some financial responsibilities for the property. Typically, the tenant covers the operating costs of the property, such as maintenance, in addition to paying rent. Or they may pay a portion of taxes on the property, insurance, and maintenance costs.
- Ground Lease: A ground lease is a lease on just real estate. Typically, the property owner allows the tenant to build on a vacant piece of land. The property owner may offer a ground lease for 50 to 99 years, which often takes place between two commercial landlords rather than the tenant themselves.
Pros and Cons of Triple Net Leases
There are pros and cons to all types of leases. Since triple net leases are so common, consider how these leases impact property owners and tenants. The key with these leases is they tend to be very easy to understand and can be negotiated based on the needs of both parties. There are some key factors to know about them.
Pros and Cons of Triple Net Lease for Tenants
The pros for tenants:
- The tenant maintains control over the appearance of the property and maintenance, which may enable them to ensure their business’s appearance is maintained
- The tenant has control over the costs they pay. This could include water or electricity, for example. They select the carrier they use for insurance as well as the level of insurance they have. If taxes are high, the tenant may be able to get them lowered.
The cons for tenants:
- The tenant takes on a lot of risk in terms of property tax and insurance increases and assumes the costs of maintaining the property
- In some cases, property landlords may overestimate the cost of operating the property, which could mean the tenant is overpaying for those services
- Tenants may need to invest the time into finding the right supportive services for the property
- There could be unexpected costs the tenant must pay
Pros and Cons of Triple Net Lease for Investors
The pros for landlord or investor:
- This type of lease creates a revenue stream that’s consistent
- Much of the hassle and risk is passed on to the tenant, including the day-to-day operation of the property
The cons for the landlord or investor:
- It may be harder to find tenants for these properties because of the significantly higher costs. This could mean a significant amount of time between tenants as well
- There could be concern about the tenant credit risk
Are Triple Net Properties a Good Investment?
They can be a very good investment for some property owners who want to be more hands off in their investments if they can find the tenants to work with for these types of properties.
What Is a Good Cap Rate for a Triple Net Lease?
This is somewhat subjective. That is because it is dependent on the investor’s goals and needs. Most of the time, the cap rate range is 4 to 10 percent.
How to Invest in Triple Net Properties: 3 Tips
Keep the following in mind:
1. For those considering the investment in triple net property tax, insurance costs and maintenance costs need to be assessed carefully. Look at the whole picture before investing.
2. Financing for triple net properties is typically available to well-qualified borrowers through a range of loan types, and careful consideration of those loan types is important.
3. To build passive income with these properties, choose the ideal location for those properties based on the city’s business climate and the type of property it is.
How to Find the Best Triple Net Lease Properties
In many cases, when looking for triple net lease properties, it is critical to consider the property’s history. The best properties tend to be well established and provide the tenant with a highly desirable location, which encourages the tenant to take on more of the risk associated with the property. These properties typically should have a strong amount of traffic in a business area.
Wrapping Things Up: Triple Net Properties
Triple net properties provide opportunities for investors looking to build a portfolio of property who also do not want to be hands-on during the management of the properties. Financing triple net properties through a competitively priced loan is typically an option, depending on the borrower’s creditworthiness and the property’s use.