Among all of the lease agreements, the Triple Net Lease agreement holds a special place. At a glance, it offers high and long-term yields for a landlord under very moderate obligations for property maintenance. That is the major reason why investors purchase real estate, keeping the NNN as a goal in mind.

In this article, we will review the essence and the definite Triple Net Lease benefits that are much appreciated by many investors and make this type of property arrangement very popular.

Triple Net Lease Agreements at a Glance

A Triple Net Lease agreement is a commercial lease contract according to which the lessee covers the vast majority of property-related expenses. The lessee pays rent and utilities associated with the leased property. In addition, the lessee also bears insurance, maintenance costs, and taxes.

Given the multiple Triple Net Lease benefits – which we will cover in detail a bit later – they are very popular among investors. Under these arrangements, the investors bear minimal financial and managerial responsibilities. Aside from those benefits, property owners are far less vulnerable to market fluctuations, including costs.

Taking into account the specific terms of this agreement, it is typically concluded for a long term – from 10 to 15 years. Contracts for a much longer period are possible as well. Such durability gives much confidence to both sides of the agreement. They can plan their operations for a long period of time assuming the stability of the deal. However, this is definitely not the last benefit of the Triple Net Lease agreement we should review.

Triple Net Lease Benefits: Why This Option Is a Worth One for Landlords

Triple Net Lease agreements are very advantageous for landlords in the first turn. This arrangement is very convenient and brings lots of long-term benefits:

1. Steady passive income

The opportunity to get a passive income is among the most obvious Triple Net Lease benefits. Unless a landlord faces the need for large capital repair, a property owner may relax and collect rental payments as agreed.

Another substantial benefit of the Triple Net Lease agreement is that the landlord bears very few overhead costs. Once this agreement is signed, the landlord remains in charge of some minor maintenance costs, typically, they are long-term. On the other hand, a tenant overtakes the vast majority of the expenses for property maintenance and repair.

2. Low involvement needed

Occasional inspections of the leased property are required only. The landlord is not involved in the day-to-day management of the leased property while the tenant enjoys maximal flexibility in arranging the leased property as one thinks fits best.

3. Longer lease terms

Most Triple Net Lease agreements are concluded for a long term. This means that a landlord will typically obtain the rental payments within the next ten years of the effective date of the agreement or even more. Longer contracts are possible as well.

4. Favorable terms of financing

Lenders commonly are more open to providing more favorable terms of financing to investors who can enter the Triple Net lease agreement. If reliable tenants sign this type of agreement, the investors may finance the chosen real estate object with a symbolic 5% down payment. Under the traditional terms, this down payment is at least 20%. However, most often, it is more.

Finding Reliable Tenants

This is probably one of the most important parts of the deal. A tenant needs to have a reliable track record. Nowadays, it is also essential to consider the nature of business a tenant will carry out within the leased property.

Branding and the long-term growth strategy are among the most valuable factors signifying the tenant’s reliability. If a tenant has a reputation of a good brand, it is definitely worth one to conclude the Triple Net Lease agreement. This is especially relevant for a prime location. If a business with a reliable reputation opts for it, this signifies its long-term commitment and reliability. The latter aspect is important to ensure the stability of the agreement and enjoy more favorable terms of financing, as highlighted above.

Other Factors to Consider When Entering the Triple Net Lease Agreement

Aside from the reputation of the tenant and one’s readiness to bear long-term commitments, there are many other factors to consider when you are going to conclude the Triple Net Lease agreement:

• Property location. We have already touched on this aspect partially yet it deserves special attention. The investors may enjoy the entire Triple Net Lease benefits if they lease real estate with a favorable location. It is perfect if it is located near other businesses or otherwise has intense foot traffic nearby. Tenants typically look for such spots since they almost certainly guarantee a steady flow of customers.

There are specific factors helping to assess each location from a business perspective more precisely rather than intuitively:

• Population density and growth – the higher it is, the higher yields it promises a business. If there was a population growth over the last years or it is forecasted, this is a spot worth investment.

• Median household income – this is another important factor that will guarantee higher revenues.

• Workforce – the place is more promising if there is enough skilled workforce nearby that can contribute to a business.

• Duration of the lease. The typical term of the Triple Net Lease agreement varies between 10 and 15 years. However, longer terms are also possible – 20 years or longer. Concluding this type of agreement with a reliable tenant when there is a prolongation clause is even more beneficial for the landlord. In this case, there is no risk that the property will be vacant for a long period of time between two tenants. In this case, a landlord will not have to pay any maintenance expenses from one’s pocket.

• Property condition. This aspect also impacts the price and it does matter at the moment of entering the agreement. If the property is in good condition, then it is in the tenant’s favor. If the property needs repair, then all associated costs should bear the tenant. However, the landlord has to keep the property in sufficient condition to attract a good tenant.

• Debt on the property. This aspect remains after the landlord under any circumstances and terms of the Triple Net Lease agreement. If such debt is in place, the landlord has to make sure that this debt is repaid in line with the laws and terms of the agreement under which the debt has emerged. It also should not impact the ordinary course of tenant’s operations. Otherwise, this may result in a serious breach of the Triple Net Lease agreement with the tenant.

Why Would Someone Agree to Sign the Triple Net Lease Agreement?

After reading the entire characteristics of the Triple Net Lease agreement, it may appear that no one tenant will likely sign it since it envisages more benefits for the landlords. However, this is only one side of the coin.

On the other hand, among the Triple Net Lease benefits there is one very convincing for any tenant. The rental price according to this agreement is lower compared to other similar samples. This offer appears to be even more attractive for any tenant if the property is in a good or even excellent state. If it has a superior location, it makes the object even more attractive to investors. The opportunity to have possession of such a good real estate object for a long period of time is another argument for a tenant to enter exactly this agreement.

There is also one thing protecting the tenant’s interests. Some Triple Net Lease agreements have the so-called “caps” or the upper limits. This is a maximum limit on how much the Triple Net Lease charges may increase within a year. This cap greatly secures the tenant’s interests from unforeseen increases in property costs.

What Are the Tenant’s Responsibilities under the Triple Net Lease Agreement?

Under the Triple Net Lease agreement, the tenant bears the vast majority of responsibilities. The tenant pays all associated maintenance costs and modifies the property at one’s expense as well. Aside from those, the tenant also remains in charge of covering one’s business expenses and franchise fees, if applicable.

In general, all of the costs the tenant bears can be subdivided into two categories:

• Property costs. These costs include rental payments, utilities, basic maintenance costs, applicable property taxes and other fees, repairs, and property insurance.

• Business costs. This group of costs covers inventory expenses, possible legal fees, business taxes, wages, office supplies, business insurance, and accounting expenses.

Bottom Line

The Triple Net Lease agreement is a good option. It suits perfectly investors who are looking for long-term and low-risk real estate investment. This agreement is much more suitable for landlords since it gives them a steady source of income with minimal personal commitments. The single major endeavor that a landlord has to ensure is the sufficient state of the property to attract a reliable tenant.

At the same time, the Triple Net lease agreement is also beneficial for tenants. It gives them enough freedom to arrange the property according to their needs for a long period of time. This agreement ensures maximal stability and flexibility, backed by clear terms that can’t be changed unilaterally by the landlord.

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