The Triple Net Lease
November 9, 2024
Sounds boring! It can be until you start looking at what it means and how you can benefit from a Triple Net Lease (NNN). What is it? The NNN lease is a type of lease used in commercial real estate. If you are considering investing in real estate you need this information. It’s very simple.
You own a commercial property. You lease it to a tenant and use the NNN lease. That means in addition to the base rent, the tenant pays the property taxes, the insurance on the property, and they are responsible for all maintenance and repair costs. They also pay all utilities and any other expenses.
So what’s left for you to pay? You will have to pay your loan payment on the property and if you hire a property management company any management fees they happen to charge. And if you use a broker to acquire a tenant there will be lease commissions. But that’s a one time commission when the tenant signs the lease.
If you have a NNN leased property there is not much need to have a management company. They are fairly simple to self manage. And if you’re fortunate enough to find your own qualified tenant you won’t necessarily need a broker’s services so you can save the commission. Although I recommend using the broker to find a tenant. They are experienced at finding and screening qualified tenants, and handling the lease documents and the negotiations.
One benefit to you in having a NNN leased property is simplicity. The tenant is responsible for repairs and maintenance. You don’t have to spend your weekends doing parking lot cleanup and landscaping work. You hire someone to do that and the tenant pays for it. The tenant hires a plumber when they have plumbing issues. They mostly leave you alone.
Property Taxes & Insurance
When the property taxes come due at the end of the year, you get a tax statement. You either collect the amount from the tenant at that time or you have them pay an estimated amount as an addition to their monthly rent (recommended). If the tax went up and they underpaid you bill them for the difference. If it went down (it could happen) then you refund the difference.
The same is true for insurance. They pay the monthly insurance premium in addition to their rent. If the premiums change you adjust the amount they pay accordingly.
What's The Advantage Of This?
You always know what you are getting. You will have a reliable recurring income that will remain steady throughout the term of the lease. While there is really no such thing as completely passive income, there are varying levels of passive income. The NNN lease rates fairly high as a passive income investment.
Your Exit
There is also a benefit to your exit strategy. When investors go shopping for a new property, they will typically look for NNN leased properties first. They will prefer this type of property for all the reasons mentioned above. In other words, the NNN leased property is in demand. And that means it will bring a higher price and will likely sell faster depending on the quality of the tenant.
In fact, there are commercial real estate brokers that exclusively sell NNN leased properties. And there are brokers that exclusively represent the tenants in leasing the properties.
Property Types
What kind of properties can you use the NNN lease for? Currently you can expect to find NNN leases in almost all retail properties. To the best of my knowledge this is where it all started. Office properties have traditionally been a variation of a gross lease (tenant pays a flat rental rate and the landlord pays all the expenses). Over the last several years office properties in smaller buildings have increasingly used NNN leases. They can be a little more complicated but it is being done more and more.
Industrial properties have also been going to NNN leases over the last 10 to 15 years. Where my brokerage operates in the Permian Basin in west Texas, you will rarely if ever find an industrial property that is not a NNN lease.
There are many types of leases out there. The NNN lease is the most sought after by investors. If you invest or are planning to invest in commercial real estate you should get to know the ins and outs of NNN leases. And as always, when investing in real estate have a CPA and an attorney with real estate investment experience. They can save you!
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