If you’ve been researching investment opportunities in commercial real estate, you have probably come across many terms you are unfamiliar with. It can seem overwhelming to figure out if investing in real estate is truly what you want, especially when you don’t understand what is being discussed.
The term “NNN lease” may have been tossed around a bit in your research, as it’s a common form of leases that is often used in commercial spaces. But do you know the definition of NNN? If you don’t, it can be hard to decide if that’s the right type of investment for you.
Let’s take a look at the definition of a NNN investment, also known as a triple net lease, and how these lease types are set up so that as you search for the perfect investment, you know what you’re looking for.
What is the Definition of NNN Investing?
NNN or triple net, is a type of real estate investment structure for commercial spaces. It’s very common for retail properties or medical spaces because of the terms set forward in the lease. Essentially, what NNN investing boils down to is at the core of the definition: net, net, net. Each N stands for an expense the tenant would take on in addition to their monthly rent: annual property taxes, insurance premiums, and common area maintenance upkeep costs.
This type of lease is built off of the premise that the tenant agrees to take on more than just their monthly rent payments. In a standard net lease, the extra expense the tenant takes on is related to operating expenses (like repairs, insurance, or taxes). In a triple net lease (NNN lease) the tenant takes on all of these different expenses. This means the investor (you) wouldn’t need to head out to the property or hire someone to make repairs. You also won’t have to worry about property taxes or insurance premiums for the space, in most cases. (Obviously each lease is different, so there may be a unique circumstance that varies from the norm.) When a commercial real estate investor is looking for a hands-off, no hassle property, a triple net lease is the way to go.
The Difference Between Single Net, Double Net & Triple Net Leases
Now, the difference between single net, double net, and a triple net lease may sound pretty clear cut: there are more responsibilities on the tenant and less on the landlord with each increase in the number of “nets.” Each type of lease used in commercial real estate depends on the parties in the agreement, and the structure can vary greatly.
The primary difference here is that with a single net lease, the tenant pays for rent and property taxes. In a single net lease, the investor, property owner, or landlord is responsible for the maintenance and repair costs, as well as the property insurance. This is the least common type of lease for commercial real estate investors.
Then, with a double net lease the tenant adds the insurance premium to their rent and tax responsibilities from the single net lease. The landlord still maintains responsibility for repairs or utilities. This is still time-consuming and may be costly for the owners.
The triple net lease, the most common type for retail properties and other commercial properties, puts that last responsibility of repairs and utilities — the day-to-day costs — on the tenant. It’s an agreement that benefits both the landlord and the tenant, which we’ll look at a little more closely later.
Understanding NNN Leases
NNN lease properties are great for investors looking for an investment opportunity with consistent, equity-building returns without the day-to-day responsibilities traditionally associated with owning properties. By definition, triple net leases (aka NNN) put those responsibilities onto the tenant, freeing up investors for other projects and properties. Let’s take a closer look at NNN leases and what goes into them.
Aside from the financial responsibilities for tenant versus investor, NNN leases usually anywhere from 10-25 years, meaning they are a consistent, long-term earner for investors. The business agrees to occupy the space for many years, meaning that the landlord doesn’t need to constantly be seeking out a new tenant or dealing with empty properties.
As discussed above, each lease is unique, so different terms may be set regarding those costs. Operational costs like maintenance and repairs, taxes, and insurance are usually fully paid by the tenant (and often absorbed as a business expense), but occasionally that cost may be shared with the property owner. However, this would be outlined in the lease so there are no surprises for either party.
The Benefits of NNN Investing
NNN leases have benefits for both the investor and the tenant. As an investor, you can expand your portfolio with a consistent income stream without the costs and responsibilities typically associated with being a landlord of commercial properties. In most triple net lease investments, the property owner is not responsible for the daily tasks like maintenance, repairs, or upgrades. Instead of operating as a landlord, you can spend your time working on other properties or projects you are passionate about or looking for your next investment opportunity to further diversity or expand your portfolio.
As a tenant, they will gain a desirable location for their business. They can also have a greater control over their space, as they can hire a handyman they know and get repairs done on a schedule that works for them — and they don’t have to wait to call the landlord to make any sort of repair.
But the benefits of a NNN property go beyond these reasons for investors. Oftentimes, you can find a triple net property at a lower entry price point, meaning investors can invest at a more affordable rate and get started with a new property sooner and enjoy the benefits of said property for longer with a good return on the investment.
What Makes a Good NNN Property?
How do you know if the property you are looking at investing in will make a good triple net lease investment? The right NNN lease investment is important for a property that can add value to your portfolio for many years to come. In order to find the right fit, you need to find the best property for an NNN lease, which may vary from other properties in your portfolio. There are a few key elements that you should keep in mind as you find the right investment opportunity to expand or diversify your portfolio:
- Geographical Location: The geographical location of the property makes a huge difference in its investment potential. Growing cities and areas with population growth or economic booms are often the ideal place for NNN properties.
- Property Location: Aside from the geographical location, the actual location of the property is one of the most compelling factors of a real estate transaction. A NNN property should have an easily accessible location, like a corner with high traffic and proximal businesses to bring more people to the area is positive when evaluating triple net investment value potential.
- Business Type: The long-term success of your investment relies on the success of the business, so the type of business it is can impact your investment. In order to ensure that you have a reliable tenant who will be consistently responsible for paying rent and keep up with the other expenses associated with a triple net lease, you should look for businesses that will be able to withstand economic changes, like medical facilities, retail properties, grocery or convenience stores and pharmacies. Sometimes, this business type may be a well-known brand or chain of a large company, because the brand name alone will drive traffic and provide a sense of security for the investor. Specifically, brands like Walmart, CVS, or Family Dollar can make a great NNN tenant for their brand and longevity alone.
Pros and Cons of NNN Leases
When considering an NNN investment, you should have a well-rounded view of all of the pros and cons associated with this type of real estate transaction. There are both pros and cons for the investor and the tenant; let’s take a closer look at the pros and cons for investors, so you can better understand this type of lease as you research properties that can add to your portfolio.
Pros of NNN Leases for Investors
For an investor, a triple net property has very few risks, and it can provide a steady income. The longer length of the lease ensures that your investment won’t sit empty for long stretches of time every couple of years, so you know you won’t be constantly searching for a new tenant. You can also better plan for the income stream of the property since the tenant is usually responsible for paying, as you will know how much it can make you over the next 10 or so years. You will also be passing off many of the expenses of the property to the tenant, making it less costly or time consuming than other properties, and in other investment scenarios, expenses can really add up.
Cons of NNN Leases for Investors
As with everything, there can be cons to entering into a NNN lease. For investors, the biggest con can be entering into this agreement with the wrong type of business. Because certain businesses are better suited to NNN leases, investors and property owners need to carefully vet potential tenants to ensure that their investment will be protected from businesses that may not be able to fulfill their end of the deal. The other thing investors need to keep in mind is that everyone needs to understand the terms of the lease and who is responsible for which expenses. Triple net leases typically pass most expenses to the tenant, but the specific terms are outlined in the lease.
Pros and Cons of NNN Leases for Tenants
Just like for investors, there are pros and cons for the other side of the lease agreement. You can learn more about the pros and cons for tenants here, but here is a basic overview
- More control over your space for changes and repairs as needed
- Build in business expenses for the insurance or tax payments
- Plan for the future with a long term lease
Find a Partner for NNN Expertise
If you’re looking for a relatively low risk investment while building equity in your investment portfolio without a huge time commitment, an NNN property might be the right fit. With triple net investments, you can diversify your portfolio while keeping your time and energy for other projects you are passionate about. But the good news is you don’t have to do it alone. When you find a partner who specializes in NNN leases, you know that you have the expertise to guide you through the process. Finding the right brokers to fully understand the costs associated and potential value is essential. Whether it’s your first triple net lease investment or your twentieth. As you search for the right partner, here are some key tips for finding a qualified net lease advisor:
- Demonstrated experience in the triple net lease market: With experience in the industry, they will be able to give insight into the market, knowledge of property value and investment potential, and details on profitability of your potential net lease investments.
- Proven track record of closed NNN deals: When an advisor has shown successful negotiation strategies, they can better negotiate different scenarios in triple net investment deals. A good advisor has case studies of recent deals they closed.
- Client focused: A good net lease advisor isn’t just in it for a quick sale. They respect you and are focused on your goals and successes. They should want to help you meet all of your investment criteria and choose the best properties for your portfolio. They can help you with tasks like property evaluations and site visits, recommendations on your portfolio and strategic advice or consultations.
The experts at Sands Investment Group have helped with thousands of transactions for more than a decade. The net lease advisors can help with researching triple net listings that meet your goals and align with your strategy, and they can assist with securing financing or negotiating net lease terms on the property. To learn more, get in touch with an expert today by calling 844.4.SIG.NNN or sending us an email at info@SIGnnn.com.