Triple net lease real estate offers both investors and tenants many unique opportunities and benefits, but there are also limitations that don’t necessarily outweigh the rewards of this type of commercial lease, but are important items both parties must consider before deciding if a triple net lease is the best option to fulfilling their goals.
To understand triple net lease pros and cons, it’s helpful to first know the variations of net lease agreements used in the market. In this post, we’ll explain the differences in the varying net lease types will help illuminate the benefits and costs in each type of agreement, and help you create your own tailored list of pros and cons based on what many investors (and tenants) find most advantageous and limiting in triple net leases.
Types of Net Lease Agreements
Understanding the different types of net lease agreements will help you confidently choose the best option to support your investment and create long-term profitability in your portfolio.
Single Net Lease
In a single net lease, the tenant is responsible for paying the property taxes on the building, independently of their agreed upon monthly rent sum. Single net leases tend to be the least common agreement type in net lease real estate. The owner assumes the role of a landlord in a single net lease, and must handle all the expenses and maintenance on their investment. Additionally, even though the tenant must pay annual property taxes, the owner will often collect and remit the tax payment themselves to ensure correct, prompt payment.
Double Net Lease
A double net lease is an agreement between a property owner and a tenant in which the tenant (in addition to monthly rent) is required to pay:
- Property Taxes
- Insurance Premiums and Claims on the Property
The property owner acts as a landlord and is responsible for handling all the building upkeep and maintenance costs to keep the property functional and operating.
Triple Net or NNN Lease
A triple lease, which is also known as an NNN lease, is an agreement between a property owner and a tenant where the tenant (in addition to a monthly rental fee of the building or space) absorbs all the costs and expenses for the property, including:
- Property Taxes
- Insurance Premiums
- Maintenance, Upkeep and Repairs
Absolute NNN Lease
An absolute NNN lease, also known as a bondable lease, is an agreement between a property owner and a tenant, in which the tenant is responsible for not only the monthly rent of the building, but also all of the expenses of that property as well. Absolute NNN leases hold the tenant responsible for:
- Insurance Premiums
- Property Taxes
- Building Maintenance and Repairs (Including the Structure and Roof)
The most important distinction between a triple net lease and an absolute NNN lease comes down to structural and roof repairs. A triple net lease often outlines these types of repairs as the full or partial responsibility of the property owner. However, in an absolute NNN lease, the tenant is responsible for all the expenses on the property, including the structure and roof.
Triple Net Lease Pros and Cons
Triple net leases offer many distinct benefits for property owners and tenants alike, but they also have some limitations that both parties should understand before entering a long-term NNN lease agreement as well.
Pros of a Triple Net Lease-Property Owners
NNN properties are very appealing from a commercial investment standpoint due to the many advantages this type of deal can offer to both property owners and tenants.
- Guaranteed, Long-Term Occupancy: A NNN lease is structured to offer long-term tenant occupancy (which is often upwards of 20 years), which is beneficial to an investor because it removes the risk and losses of a property sitting vacant between tenants.
- Low-Risk Investment: In a triple net lease, the tenant absorbs all the costs associated to the property, from taxes and insurance to regular upkeep costs.
- Reliable Income Stream: A NNN lease helps secure a reliable income stream from your investment property. Deals are structured to include a consistent amount of rent each month, over an extended period of time, and passing along all the property expenses to the tenant helps protect your investment from unknowns and surprise costs.
- Equity: Many investors add triple net lease properties to their portfolios as a conservative, low-risk strategy to create more equity. Often times, investors will hang on to a triple net property and use it as an equity builder for at least 5 years, and then sell the property when the market peaks, population spikes, or when they’re ready to use that equity in their next investment.
- Little to No Landlord Duties: With a triple net lease in place, you’re not tied to the property with your time or money as a landlord. Low-touch management frees up your time for other ventures and ensures you’re not locked into landlord duties for the property.
Pros of a Triple Net Lease-Tenants
Though tenants in a NNN lease accept more financial responsibility for the property than in other lease types, triple net leases are also quite advantageous for tenants in numerous ways.
- Lasting Business Location and Footprint: A long-term NNN lease provides tenants with a great opportunity to create a recognizable and long-lasting location for their business.
- Location: Triple net lease properties typically offer a great, accessible location for a business. These properties will usually be proximal to other popular businesses, which helps a tenant gain traffic and exposure to customers who frequent other businesses in the area.
- Tax Benefits: In a triple net lease, the tenant is responsible for property taxes. However, they can build these costs into their business operating expenses to achieve tax benefits for their business.
Cons of a Triple Net Lease-Property Owners
While an NNN lease can offer an array of great advantages for investors and tenants both, there are some limitations inherent in these deals that keen investors will want to keep in mind when considering a NNN lease.
- Earning Caps: While a NNN lease provides a consistent revenue stream each year on your investment, that amount is typically fixed for the term of the lease. This means you can’t increase the rent if property values in your area spike which can limit your earning potential in times of growth.
- Vacancy Risks and Rollover Costs: Though triple net leases are long-term, there is the risk of a tenant defaulting which can result in losses as you try to fill the vacancy. While you can limit this risk by vetting tenants and their businesses thoroughly, this is always an inherent risk.
Cons of a Triple Net Lease-Tenants
Tenants should be aware of NNN lease limitations that could impact their success in a location, including:
- Assuming Property Expenses: In a triple net lease, the tenant will be responsible for the majority of the expenses that go into the operation and upkeep of their business location. Tenants must have a strong credit profile to gain an NNN lease, but they should also be prepared to finance the expenses of building operation, in addition to the other expenses that go into running their particular business.
- Tax Liabilities: Because the tenant is responsible for annual property taxes in a triple net lease, this also means that they will be prone to all the liabilities of taxes as well, including fines and penalties for late or incorrect tax remittance.
Identify Your Triple Net Lease Pros and Cons With a Net Lease Advisor
Frequently, when an investor comes in on a triple net property, there is already a tenant agreement in place which outlines all the specifics of the deal, complete with clauses that outline exact financial responsibilities of both the tenant and the property owner.
By purchasing a property with an existing triple net lease in place, you inherit the terms of that deal as they’re outlined. This means that you should pay very close attention to every detail of the existing lease before deciding to purchase the property, so that you know ahead of time if you will be responsible for any insurance premiums or major structural repair costs (which are often distributed between landlord and tenant or are the responsibility of the property owner). Working with an established net lease advisor can help you navigate triple net lease terms and choose the properties that will bring you the most benefit.
Sands Investment Group is knowledgeable in triple net leases and have the expertise to guide you through all the pros and cons of your net lease investments. Our client-focused approach, extensive connections, and marketing expertise are just a few of the ways we’re leading the net lease industry. In fact, we’re the fastest growing net lease investment company in America, with over 1,900 transactions in 48 states (to the tune of $4.5 Billion) since 2010.
Want 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.