Generate Cash Flow with Triple Net Lease Properties
The triple net rental agreement stands for three times the net rent. To put it simply, the tenant bears the costs for the property himself. In addition to the net cold rent, the tenant also has to pay the operating costs, costs for insurance, taxes, and the costs for maintenance and repairs on the roof and compartment of the property. The term roof and compartment is a term from commercial real estate law. This includes the roof, load-bearing parts of the building, load-bearing walls, and the outer facade. Other than that, you have the opportunity to generate cash flow with triple net rental property.
These triple net contracts may only be concluded in commercial tenancy law. These contracts are individual agreements that are excluded as general terms and conditions in rental housing law. In commercial tenancy law, the contracts are freely negotiable so that a triple net contract can be concluded with legal effect.
Background of the Triple Net Lease Agreement
Double Net leases are most widespread in the USA in the commercial real estate sector. In comparison, triple net contracts come from Anglo-Saxon countries and are less common in rental contracts. These are often sale & lease back or single tenant properties. In general, freedom of contract applies to commercial real estate law. It is assumed that there are two equal parties who both have certain know-how and contracts are concluded or have sufficient resources to buy such knowledge. This results in different contracts with different regulations.
A triple net lease is most commonly used with a supermarket that is the sole tenant in a property that was built specifically for it. Colloquially, one speaks of a shoe box. In most cases, the building was built by the supermarket itself and then leased back as a sale and lease back.
Cost recovery clauses
Tenants who conclude a Triple Net contract are, in most cases, aware of their situation. For this reason, clauses are often incorporated into these leases that “cap” the costs. An example of this can be that the costs for repair and maintenance may not amount to more than a certain percentage, e.g., 5% of the annual net rent. In this way, the tenant wants to ensure that one-off, unforeseeable costs of several hundred thousand euros do not arise, for example, when the roof is repaired.
Triple Net Lease: Pros and Cons
Triple net leases offer some unique benefits to both investors and tenants. However, there are some caveats to this type of commercial lease that both parties should consider before entering into a triple-net long-term lease. While tenants in a triple-net lease broadly assume more financial responsibility than other leases, they can benefit tenants in several ways.
Benefits of Triple Net Leases
A triple net lease is an agreement between a property owner and a tenant in which the tenant pays property taxes, insurance premiums, and maintenance and repair costs in addition to monthly rent for the building or space.
Most triple-net leases are structured to allow for long-term tenant occupancy (20+ years). This is beneficial for landlords as it removes the risk and losses of a vacant property between tenants.
Because the tenant bears almost all of the costs associated with the property — from taxes and insurance to ongoing maintenance costs — a triple-net lease is a relatively low-risk investment for an investor.
The constant stream of income
A triple net lease can provide an investor with a constant source of income. This type of lease is structured to charge a flat rental amount each month over an extended period of time. In addition, the bulk of the unknown or catastrophic property costs is passed on to the tenant to hedge the risks of the investment.
Triple net lease properties are often included in investment portfolios as a conservative, low-risk strategy for creating more equity. Additionally, investors may choose to sell the property when the market peaks, the population increases, or when they are ready to use that equity for their next investment.
Reduced landlord obligations
With a triple net lease, you don’t have anywhere near the landlord’s responsibility as you do with a more conventional lease. With more time and money, an investor can pursue other ventures.
Long-term business footprint
Tenants who agree to a long-term lease have the advantage of being able to create a recognizable and permanent location for their business.
Typically, triple-net lease properties are located in accessible areas that are near other popular businesses. This can help a renter gain traffic and attention from customers visiting other nearby businesses.
Because renters in a triple-net lease are responsible for paying property taxes, they may be able to include these expenses in their business expenses and gain some tax benefits for their business.
Disadvantages of Triple Net Leases
For landlords tied to a long-term lease, they lose the ability to increase the rent as property values in the area increase. In the long run, this can limit earning potential.
Vacancy risks and rollover costs
There is always a risk that a tenant will default, even if it is a long-term lease and the tenants have been thoroughly screened. Investors may incur losses during the time they try to fill the vacancy.
Assumption of real estate costs
With a triple-net lease, the tenant assumes responsibility for the operation and maintenance of the business location. In addition to the (sometimes) high operating costs, tenants must also be willing to finance the construction work and the unexpected expenses associated with it. This can be a major financial drain, and renters must have a strong credit profile to qualify for a triple-net lease.
If the renter becomes responsible for the property tax, they will also be liable for all associated liabilities, including fines and penalties for late or incorrect tax transfers.
Triple Net Lease Example
Many large, multinational companies that want a unified brand are opting for triple-net leases. Walgreens is an example of a company that often agrees to triple net leases. In 2019, Walgreens was the second-largest U.S. pharmacy by total prescription drug sales. Walgreens specializes in prescription drugs and convenience shopping for household items. Walgreens opts for 25-year triple-net leases.
When a company opts for a triple net lease, it absolves the landlord of any financial or physical responsibility. They do their own maintenance, use their own providers, order their own signage, and pay for the operating costs and capital expenditures. However, by agreeing to triple net leases, Walgreens has a choice of prime retail locations.
Walgreens stores are typically located in prime locations – 4-acre lots on key corners in major retail districts. Walgreens seeks out these corner locations for their first visibility. The company is considered an excellent tenant in the field of triple-net leasing and a conservative investment for investors.