Do you own commercial property or plan on investing in such property? If you’re new to the game, you may have heard a term like NNN or Triple Net thrown around in conversations regarding leases. Owners use different types of lease agreements for commercial properties, even different net leases. How, then, do we demystify NNN in commercial real estate leasing?
A Triple Net (NNN) lease is a commercial real estate lease agreement where the lessee is responsible for paying the base rent and the operating expenses associated with the property. These expenses usually fall into three categories: property taxes, insurance, and Common Area Maintenance (CAM).
Whether you’re an owner or a tenant of a commercial property, understanding the lease agreement is crucial to avoid disputes regarding payment and maintenance responsibilities. NNN leases have advantages and a few drawbacks for both parties. However, if negotiated and calculated well, they can foster a long and happy business relationship.
What Does Triple Net Mean In Commercial Real Estate Leasing?
In the commercial real estate field, a net lease requires the tenant to pay part or all of the expenses associated with the property. When an owner leases out a building using a Triple N lease, the tenant is financially responsible for the building insurance, maintenance costs, and property taxes in addition to the rent and utilities.
Rent tends to be lower with NNN leases because the tenant carries the extra costs that are traditionally the landlord’s responsibilities. This can have benefits and disadvantages for both parties.
Other types of net leases include single and double net agreements. Each lease type tacks on an extra expense category.
- A single net lease means the lessee must pay their rent, utilities and the property taxes.
- Double net agreements include insurance costs to the above expenses.
Discover The Inner Workings Of A Triple Net Lease
Triple net leases often suit industrial tenants or those renting an entire building that may be divided into smaller entities for retail or commercial purposes. In NNN leases, the lessee pays for almost all expenses.
The tenant must manage all maintenance, repairs, and upgrades while leasing the property, including CAM and structural repairs, which allows for reduced rent. It’s not only a landlord’s dream to have tenants taking responsibility in this way; some tenants prefer to manage their premises so they can make suitable adjustments for their business.
There are no structured rules for the landlord’s responsibilities in a triple net lease. All negotiated items will be listed in the lease agreement. Sometimes, the landlord maintains specific areas of the property, such as the roof or parking lot.
Consider The Pros And Cons Of NNN Leases
At first glance, the landlord may seem to be the clear winner in NNN leasing situations. Still, there are advantages and drawbacks for both parties and understanding them will help you decide if it is right for your business.
The advantages of a triple net lease for landlords of commercial real estate include:
- It can provide a long-term, reliable revenue stream. NNN leases are usually agreed upon for 10 -20 years. The monthly rental is written into the contract with specific increments planned for certain dates.
- There are very few overhead costs.
- The landlord has few management responsibilities. With the tenant handling the maintenance, owners don’t have to do much besides enjoy their investment!
- It allows your business to build equity. There’s little risk, enabling you to hold on to the property long-term or sell it when the market is optimal.
- Potential tax breaks.
Tenants can also enjoy the advantages of NNN leases:
- The tenant has complete control over the premises, enabling them to maintain and change the property according to their vision and business type.
- Tenants also have control over their expenses, such as water and electricity. They can also choose their insurance carrier and dispute property taxes if necessary.
The downside for commercial real estate owners with NNN leases include:
- Finding reliable tenants willing to sign for extended periods may take time and effort. Periods of vacancy mean no income until they source tenants.
- Finding creditworthy and financially stable tenants is vital as they are responsible for all the property expenses.
Tenants may also experience some drawbacks in triple net leases:
- They assume the risk of increases in property taxes and insurance, along with property maintenance costs.
- They may experience unexpected expenses during their tenancy, such as tax liabilities or extensive maintenance and repair costs.
What Investors Should Look For When Buying NNN Properties
When considering buying a commercial property, you may wonder whether NNN leases are good investments. In most cases, the answer is positive, but investors must always do their homework thoroughly to find the best possible property.
Investors should consider certain factors before buying NNN properties. NNN investors typically seek properties for rental purposes without complicated landlord responsibilities. When shopping for such a property, it’s imperative to calculate the return on the investment. These can vary greatly, depending on the property’s location, landlord responsibilities, and the tenant’s remaining term.
Investors should choose properties in well-established, convenient areas with high foot traffic. It’s essential to investigate current tenants thoroughly. Try to guage whether they will continue renting once you’ve bought the property. It’s also important to determine whether they have a history of sticking to the lease agreement’s conditions and paying their rent on time.
NNN properties with a steady population and economic growth are typically excellent investments. Malls, amusement parks, and restaurants are good examples.
Learn To Calculate The Triple Net Lease
After purchasing the NNN property, the investor must calculate the monthly rental. Landlords new to the game can use this standard formula to create a fair and realistic figure:
Total annual rent + Annual Property Taxes + Annual Insurance Costs + Annual Maintenance Expenses/ 12 = monthly NNN lease amount.
Conclusion
Demystifying NNN leases in commercial real estate investing is essential for both tenants and landlords. While triple net leases offer landlords advantages like a stable income and minimal responsibility, tenants pay a lower rent and can still do alterations to the property to suit their vision for the business. With a clear, well-written NNN lease negotiation, it’s a win-win situation for all.