How Do You Value A Triple Net Lease?
This kind of lease can be perfect for an investor and a great opportunity to find a place for the business. Still, it’s not an ideal thing, and you should evaluate your circumstances to evaluate if it’s the best variant for you. To estimate the value of something, you need to weigh all strong and weak points and analyze the pros and the cons. And you need a deep understanding of the concept itself. We’ll try to answer the most frequent questions regarding this concept and analyze the advantages and downsides it can bring to both sides.
The Definition and Main Features
NNN lease implies rent and a share of all expenditures for the building. It’s a usual practice for business real estate but can be used for residential rent. Each leaseholder pays the low base rent if this renting is used in multi-tenant buildings. But all the expenditures on janitorial service, maintenance, and repair are divided between the occupants, so each of them has to pay extra. The leaseholders are responsible for all emergency cases, but the low monthly payments compensate for these risks.
Advantages for Participants
A NNN lease is a two-sided agreement to discuss both sides’ pros and cons. It may seem surprising, but this agreement has multiple beneficial moments for the owner and the occupants.
Landlord
- Low risks. As we said before, almost all the risks are shifted to the renters in exchange for a low rent. This makes NNN lease a perfect solution for the landlords searching for stable cash flow without constant management. If the building is relatively new and well maintained, the owner can avoid visiting it for years, receiving the rent to the bank account.
- Low-time expenditures. The leaseholders manage all the everyday problems, so the building owner receives monthly payments without any time spending. If there is something wrong, for example, with electricity in the building, occupants will organize the repair themselves. In the modern world, time is a valuable resource, and the owner saves a lot of it.
- Guaranteed stability. The landlord receives a certain amount of money every month. Yes, the sum is not as big as in the case of a gross lease, but it’s pure income. The landlord spends a part of the gathered money for the property maintenance with other leases kinds. This spending can vary month by month, so it’s impossible to predict the exact income the next time. In this case, you have to decide what you prefer: higher earnings or stability with low risks.
Tenants
- Transparency. Tenants organize the maintenance themselves to know what their money was spent for. There is no way the owner can trick the leaseholders into paying more than necessary.
- Control. Many people face the situation when the landlord knows about the problem but does nothing to solve it. In the case of a triple net lease, this possibility is eliminated. The tenants can fix the issue when they want, and it’s a strong argument in favor of this type of lease.
- Possibility to save money. All the funds held on the repairs and services go to the occupant, not the owner. The tenant can do some work, for other cheaper services are available. In any case, the tenant decides where to spare and where to pay more.
Disadvantages for Participants
This kind of lease has not only a bright side for both landlords and tenants. Let’s discuss the downsides of this agreement.
Landlord
- Lack of control. Low inclusion of the owner into the building management can lead to irreversible damage or poor conditions. Some tenants don’t want to spend enough money; others just haven’t the necessary sum. In any case, the risk is real, and the owner should consider this possibility.
- Low income. Because the landlord receives only a fixed monthly rent, which is lower than the gross lease, the earnings from the buildings can be more than modest.
Tenants
- Unforeseen spending. Tenants can’t predict next month’s expenditures, which makes budgeting challenging. The impossibility of planning can harm business and even lead to bankruptcy.
- Different conditions of the property. It’s not necessarily a downside. As discussed in the landlord’s disadvantages, the building can be in very poor shape because of the previous occupants.
- Collective responsibility. In case of major damage to a building, all the occupants share the repair responsibility. It can be convenient if they are all reliable and trustworthy people. But sometimes, individuals tend to put their responsibility and expenditure on the other tenants.
The Total Value and Its Calculation
To estimate the total amount of this kind of lease, you should take a rent applied by the landlord. The additional costs require further calculations. All property taxes, expenditures for maintenance, and insurance are divided by the number of square meters. The result is multiplied by the number of square meters of the tenant and the received value I added to the base rent. The calculations process is quite simple, and the final payment depends greatly on the premises you rent. Of course, the calculation is the simplest if one tenant occupies the whole building. But even with multiple leaseholders, it’s not hard. In any case, once calculated, it stays the same for a long period.
Is It a Good Option for You?
We have already presented this lease’s strong and weak sides to all participants. But the circumstances can vary. So, when is the best variant? If you prefer freedom and like to manage the property yourself, go for it. If you choose to delegate the problem-solving to other people, search for another kind of agreement. In any case, we recommend consulting your attorney or consultant before making any decision. This article described only the ordinary moments; the certain building owner can offer different conditions. Don’t forget to explore the opportunities provided by other types of lease, carefully study the terms of the agreement, and don’t sign anything you are not completely satisfied with. Such an approach will allow you to choose the most suitable location with the most beneficial rent conditions.