Requirements for Triple Net Lease: Vital Facts for Tenants and CRE Investors
When dealing with commercial real estate, CRE investors prefer to apply triple net lease agreements. This is a thought-out strategy that can benefit landlords and property owners greatly, as well as tenants, and can also get some pros. Let’s outline this topic in detail and focus on its advantages and drawbacks.
NNN-lease or a triple net lease is a common lease agreement type in commercial real estate, wherein besides rent expenses and utilities, a lessee is obliged to pay taxes for real estate, insurance, and maintenance for it that altogether means ‘triple N’. Compared to a single and double net lease, a triple one requires all the expenses to be paid by a tenant, but not by a landlord.
It’s a common case that a landlord leases commercial real estate using an NNN lease which means a tenant should for all the expenses for a building in business goals with the rent rate lower than in other types of lease agreements. A triple net lease involves a capitalization rate that is determined by the financial responsibility rate of a tenant, which means the expected rate of return on commercial real estate.
Contractual Elements of Triple Net Lease
In this agreement, a tenant takes more expenses for the rented property than a lessor, so this makes NNN lease contrast to other commercial leases. In case the space is divided between several tenants, the costs are spread among them equally considering the square footage they rent. But still, lessees pay proportional monthly expenses, although enjoying a lower base rent rate.
These are lease expenses elements that are under the responsibility of a tenant:
Monthly base rent.
Janitorial services.
Utilities.
CAM (common area maintenance).
Insurance and taxes.
Structural maintenance (optionally).
A monthly rental rate is a sum stipulated in the agreement that a tenant is responsible to pay each month, besides property maintenance expenses. Janitorial expenses include trash removal, cleaning, and sanitizing. The costs for utilities entail electricity, water, gas, garbage removal, Internet & TV services. Common area maintenance includes other services outside like parking, landscaping, security, snow removal, and HVAC. Finally, taxes and insurance for the property are obligatory annual costs that are mentioned in the lease agreement.
In the triple net lease, it’s possible that a tenant will pay for repairing and structural maintenance of the property depending on its condition. Although, a tenant can save some money if the costs for taxes, insurance, or CAM are lower than in lease terms. It’s quite easy to calculate the triple net lease: it’s enough to take CAM, base rent, and taxes & insurance and summarize them altogether. Then, the total number should be divided into the rental square footage.
Advantages of NNN-lease for Tenants and Landlords
A triple-net lease isn’t as difficult to understand as it may sound. Speaking about the benefits of a triple net lease investment, it can look winning for lessors too. The great benefit for a tenant is that they pay lower monthly rent since they are obliged to cover all the property expenses. It also boosts their sense of property.
A triple net lease can be attractive for tenants due to its feature of a low vacancy rate since the expenses are divided between all the fellow tenants. Consequently, a lessee can enjoy lower monthly base rent. This agreement will work in a favor of a tenant too if they possess a high creditworthiness rating. Hence, a low rent rating makes it easy to find lessees quickly and landlords won’t have vacant buildings.
Here are other perks an NNN lease entails by making considerable financial sense both for lessees and landlords:
Long-term occupancy of the rented space minimizes lessees’ turnover.
Stable cash flow means passive income for lessors due to tenants who plan to run their business in the rented vacant space.
Minimal involvement of an investor since a tenant is financially more responsible for property maintenance and expenses for it.
Transferability between owners enables them to find more beneficial sources of income and more attractive investment opportunities without worrying about the tenants.
Low-risk opportunity to invest means NNN-lease creates more equity when an investor wants to flip properties.
Minimum management issues for investors because all the taxes, maintenance expenses, and utilities are under the responsibility of a lessee.
It’s common for the property located in high-value and high-traffic areas.
Besides the mentioned advantages, a triple-net lease can result in some drawbacks for landlords and tenants. For tenants, it can lead to an increase in monthly maintenance costs because of unexpected damage to the property.
There’s a limited ability to restructure and change the rented space: for instance, if the first tenant plans to open a clothes store, it’ll be problematic and cost-efficient for the next lessee to reconfigure it for another kind of business.
Assessing Triple-Net Lease Features: The Culminating Point
All in all, it’s beneficial for landlords to invest in NNN leases since it brings high opportunities for income and low-risk operations. As usual, it consists of commercial real estate that is leased by a single lessee possessing stable cash flow. What commercial areas are popular in NNN lease agreements? These are shopping centers, and office and industrial buildings located in the central and downtown areas.
To summarize the requirements for a triple-net lease, we can state that CRE investors should consider whether an NNN lease fits their property and find proper tenants who will rent the space. This kind of lease is perfect for CRE investors who want to have risk-free and long-term real estate investment experience, and for lessees who try to gain a flexible lease agreement while using it to build up their businesses.
We can state that a triple net lease is a gold idea for lessors and lessees because it offers freedom for the tenants, so they can arrange the leased area according to their needs for their brand recognizability. For a landlord, it’s a good opportunity to have stable passive profit and low involvement in property management.
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