Triple net lease properties have emerged as a highly attractive investment option for commercial real estate investors seeking solid capital returns. In fact, the pandemic has further boosted the popularity of these properties, as they offer higher yields compared to bonds and other similar investments. Investors recognize the stability and potential of triple net lease properties, which require less hands-on management and generate steady income from tenants. This trend is not limited to the retail real estate market; it is growing across all sectors of commercial real estate.
Types of Commercial Real Estate Leases
Before delving into triple net leases, let's first understand the different types of commercial real estate leases commonly used:
1) Gross Leases - In this type of lease, tenants pay a fixed rental amount, while landlords cover all operating expenses such as taxes, electricity, and water bills.
2) Modified Gross Leases - Similar to gross leases, tenants pay the base rent and a portion of other operating expenses for the property.
3) Net Leases - Net leases require tenants to pay the base rent plus one or more property expenses, depending on the specific type of net lease.
Each lease option has its pros and cons, depending on the circumstances of the parties involved.
Understanding Net Leases
Net leases, such as single net lease, double net lease, and triple net lease, shift more responsibility to the tenant. In a net lease, tenants are responsible for paying the base rent and one or more property expenses, which could include taxes, insurance, and maintenance costs. Double net leases require tenants to cover two of these expenses, while triple net leases encompass all three.
What is a Triple Net Lease?
A triple net lease, also known as NNN, is a lease agreement where tenants take on the responsibility of paying the lease along with all expenses typically associated with property ownership. These expenses consist of real estate property taxes, property insurance, and maintenance of the property and common areas (CAM).
Are utilities included in a triple net lease?
Yes, typically utilities are also paid by the tenant unless specified otherwise in the lease agreement with the landlord. Apart from the three net expenses, tenants are liable for utility bills, including electricity, gas, water/sewage, and even cell phone, telephone, and internet bills.
Major repairs and triple net leases
The responsibility for major repairs depends on the lease type and specific agreement between the tenant and landlord. In a pure triple-net lease, tenants generally bear all repairs and maintenance costs. However, certain leases labeled as NNN may shift responsibility for roof and structural integrity repairs to the landlord. Therefore, it is crucial for all parties to review lease terms thoroughly to determine responsibility for each item.
Pros and Cons of Triple Net Leases
As with any business decision, there are pros and cons to consider before opting for a triple net lease agreement.
Pros for Tenants
From a tenant's perspective, triple net leases offer a sense of ownership-like control over property maintenance, insurance selection, and tax protests. These leases are most applicable to standalone properties, and tenants may receive discounted rent in exchange for taking on property ownership responsibilities.
Cons for Tenants
However, the cons of triple net leases involve the organization, contracting, management, and payment of various vendors. Tenants must hire landscapers, repair companies, compare insurance policies, and navigate unexpected costs for property maintenance. Fluctuating tax liabilities and maintenance expenses may further add to the financial burden.
Pros for Investors
Investors favor triple net leases due to reduced management responsibility. With tenants assuming expenses like utilities, repairs, and taxes, landlords can enjoy a hassle-free ownership experience. Additionally, these leases provide a steady and predictable monthly revenue stream, making them highly attractive as investments.
Cons for Investors
The primary drawback for investors is the potential risk associated with having a single tenant. If the tenant's business fails, the revenue stream is severed, necessitating the search for a new tenant. Finding reliable tenants can be challenging, and the property may require significant retrofitting during tenant turnover, leading to periods with no rental income.
Triple Net Lease Properties: A Lucrative Investment Opportunity
Triple net lease properties have gained popularity among commercial real estate investors due to their relatively low risk and potential for higher yields. These properties offer a stable income stream guaranteed by long-term tenant contracts. The hands-off management approach, with tenants bearing most expenses, adds further appeal. Many investors also leverage the 1031 deferred tax exchange, a significant tax benefit that drives the demand for triple net lease investments.
Typical net lease tenants include businesses offering critical services and goods, such as grocery stores, restaurants, gas stations, and medical companies. Investments in net lease properties with recession-proof tenants offer steady residual income with minimal chances of failure.
Finding triple net lease properties can be done through online platforms like Crexi and Loopnet, or with the assistance of an investment sales broker. These properties are often developed through build-to-suit agreements with tenants.
In conclusion, triple net leases present an excellent investment opportunity for commercial real estate investors seeking stable returns and minimal management responsibilities. With their attractive benefits and potential for long-term income, triple net lease properties continue to be a favored choice among savvy investors.