Introduction to Triple N Lease Commercial Real Estate Investing
As an investor, you might have already heard about net lease agreements and maybe some of their characteristics. In fact, this type of property lease agreement is common in commercial real estate and contains many benefits for investors. This article will provide an introduction to triple N lease commercial real estate investing along with its ulterior details.
Investors have lots of options to put up their money, and the triple net lease properties are often considered among the most beneficial ones. As a part of the introduction to triple N lease commercial real estate investing, we will ensure that triple N lease agreements really take the weight off the property owner’s shoulders.
In this article, you will find an introduction to triple N lease commercial real estate investing, descriptions of other similar net agreements in the commercial real estate field, and the advantages of such a cooperation model with tenants. Moreover, you will get to know all the pitfalls related to the triple N agreements in the commercial real estate sphere.
Types of Net Lease Agreements
Both commercial and residential real estate require elaboration on the contract that describes the way of interaction between the tenant and the landlord. Such contracts regulate cooperation based on a set of rules together with federal or local legislative articles. The net lease agreement is a type of contract that regulate cooperation between a tenant and a commercial property owner.
There are three major types of net lease agreements: single net lease, double net lease, and triple net lease or absolute. The particular ‘net’ or simply ‘N” stands for additional costs that a tenant is supposed to cover under the lease agreement. Those additional spendings are property tax, building insurance, and maintenance costs. Depending on the type of the N lease agreement, a tenant is responsible for covering one or several extra aspects related to the rented commercial property. All these spendings come along with the base rent that is negotiated at the stage of signing the agreement.
Single N Lease
As every property is accompanied by the annual property tax, some investors decide to pass this on to the tenants’ hands. In fact, such type of an agreement is extremely widespread in the commercial real estate environment as it conceals benefits both for owners and their tenants.
Double N Lease
Another popular option preferred by investors is the double N lease agreement. In addition to property taxes, it obliges tenants to cover the building insurance costs. Any commercial building has to have that insurance, so tackling it that way could be a solution.
Triple N Lease
Compared to the previous two types of net lease agreements, the triple N lease contract is not used so often. However, it could be an excellent choice for investors in commercial property handling.
As an introduction to triple N lease commercial real estate investing, it is worth mentioning that such an approach helps to minimize the amount of time spent on managing and operating efforts associated with the property. The triple N lease agreement implies that property tax, building insurance, and all the maintenance costs associated with the dwelling are covered exclusively by the tenants.
What Do Common Area Maintenance Costs Include?
The third N of the triple net lease agreement might be very tricky as maintenance costs include a large spectrum of various aspects. Some landlords decide to document that in the clauses of the contract by specifying which types of maintenance costs should be covered by the tenant.
Depending on the commercial building structure and residential area, the common area maintenance costs could be presented as a fixed monthly payment. In other cases, such payments are made on demand, when something needs to be fixed or adjusted.
The typical common area maintenance costs include but are not limited to:
- Building exterior repair
Landscaping of the area
Cleaning of the area
How Does Triple N Lease Work?
Before evaluating the advantages and disadvantages of such a contract type as a triple net lease agreement in commercial real estate, we need to specify more details on that. As we have already mentioned that lessees have to pay property tax, building insurance, and common area maintenance fees. But how exactly all those payments are done? Are they made as a single payment to the owner? Who is responsible for the utility bills? Read this article further to get answers to all those questions.
When it comes to N components of the lease agreement, the tenants usually transfer the needed sum of money to the owner. Then the landlord does all the bureaucratic procedures with the needed paperwork. As the property tax and building insurance are billed on the annual basis, this sum can be transferred as a single payment by a tenant. Otherwise, it could be divided by the number of months and provided together with the base rent. This aspect is negotiated between the parties when the contract is established initially.
As for the maintenance costs, this aspect is a bit more complex to handle. In case the common area maintenance costs are done as a regular monthly payment, then lessees provide the needed sum to the owner. The rest is handled by the landlord in a similar way to that when dealing with property tax and building insurance.
When maintenance payments are done on demand, the tenants can handle this by themselves. They will need to pay for lawn maintenance, garbage removal, snow removal, and other residential operational costs.
With all this spending for extra components, a question about the amount of base rent comes naturally. Obviously, the base rent for triple N lease commercial real estate objects is lower than the standard rate in the commercial real estate market. The total monthly sum of the rent and extra costs, including property tax and building insurance portions, is still lower than the average. However, tenants acknowledge that all operational costs are within their area of responsibility.
As for the utility bills, those come on a monthly, bi-monthly, or quarterly basis regularly. The way of handling these bills is also discussed when the triple N lease contract is established between the parties. Depending on the type of commercial real estate building and the contracts for utilities provided, the payments could be done directly by the tenants or by the owner. In some cases, landlords decide to include the utility spending in the rent, so that handling bills for electricity, hot and cold running water, heating, and other stuff is done by them.
Advantages of Triple N Lease
After having explored all the major aspects of the triple N lease agreement as a type of commercial real estate contract, some conclusions could be made. First, let’s outline the advantages of the triple N lease for the landlords.
Annual real estate taxes and building insurance could be rather high for commercial real estate buildings specifically. That is why, passing this on to the lessees could be a real stress relief for owners. Even though landlords are still responsible for handling all that bureaucratic work, those are the tenants who cover obligatory additional spending associated with the property.
This aspect of the triple N lease particularly relates to the operational and maintenance procedures. In case the building needs to be restructured or refurbished, all this is done by the responsible lessees.
As with any contract in commercial real estate, the triple net lease has plenty of clauses that secure landlords from any unforeseen situations. When compiling a contract, you should pay attention to the regulation of such situations when tenants do not pay rent or refuse to cover extra costs.
Most commercial real estate buildings that come under triple N lease agreements are located in very attractive areas. This aspect is usually a decision for most businesses, so they would appreciate that. As a result, it would be easy finding lessees for your commercial real estate.
Drawbacks of Triple N Lease
There is nothing ideal, so the triple N lease agreements also have their dark side. Based on what we know about them, we could also draw out major drawbacks associated with the triple N lease.
Along with all those benefits associated with less time for property maintenance and no operational costs, there comes less control as well. If tenants decide to completely restructure the building, landlords can’t do much in such cases. You should think of how to secure this aspect and introduce any regulations if needed by introducing clauses in the contract.
The flip side of the triple N lease is the lower rent and lower net income for the landlords. This is derived from the extra costs associated with this contract.
Commercial real estate is known for its high costs for property tax and building insurance. With the triple net lease agreements, owners can pass on this spending to the tenants. The same goes for the operational and maintenance costs: owners no longer need to take care of that but make this a responsibility of the tenant. Along with all those benefits obtained with the triple N lease, landlords should also acknowledge that they get lower net income and less control over the property.
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