What Does NNN Mean When Renting Commercial Real Estate?
The most common way to make a profit from investing in real estate is to rent out this property. Although there are different types of rentals, Triple Net Lease (NNN) is popular for its simplicity.
Triple Net Lease (NNN) is a lease in which the lessee is solely responsible for all costs associated with the leased asset, in addition to the rent charged under the lease, namely, the lessee is responsible for property taxes, insurance and building maintenance.
If a property owner leases a building to a business using Triple Net Lease (NNN), the tenant is responsible for paying property taxes on the building, building insurance, and the cost of any maintenance or repairs to the building that may be required during the term of the lease. Because the tenant covers these costs, which would otherwise be the responsibility of the property owner, the rent charged in a triple net lease is usually lower than the rent charged in a standard lease. The capitalization ratio used to calculate the lease amount is determined by the tenant’s creditworthiness.
This type of commercial real estate investment has become a popular tool for investors looking for a stable income with relatively low risk. This type of investment is typically offered as a portfolio of properties consisting of three or more commercial properties that are fully leased to a single tenant with existing cash flow in place. Commercial property may include office buildings, shopping malls, industrial parks, or stand-alone buildings operated by banks, pharmacies, or restaurant chains. The typical lease term is 10 to 15 years with progressive rent increases.
The main benefit for owners of a Triple Net Lease (NNN) is a long-term stable income with the possibility of increasing the value of the underlying property. Investors can invest in real estate without worrying about management operations, downtime, improvement costs, and rent payments. When a property is sold, investors can invest in another Triple Net Lease (NNN) tax-free using the Section 1031 exchange.
Benefits of Triple Net Lease (NNN)
When the two organizations have entered into an agreement, they know the terms of the lease for the entire term. This makes it easy to know what the rental income or payment will be in Year 1 until the end of the term. All rent increases are negotiated and known to both parties. This provides a stable and reliable income stream for investors.
The landlord is generally not required to perform many services other than maintaining the property under the lease. Under an NNN lease, the landlord is not responsible for any operational obligations and therefore makes ownership very easy. Both parties provide the opportunity to benefit from property ownership without the stress of day-to-day management.
With a long-term lease, the probability of default on lease payments by a strong tenant is quite low. In the case of smaller tenants, the risks associated with missed payments increase.
Risks associated with investing in Triple Net Lease (NNN)
Dependence on one tenant
The biggest risk associated with such leases is that if the main tenant files for bankruptcy, a new tenant will need to be found to replace the original tenant. The risk of over-reliance on a single tenant can be reduced in two ways.
First, investors should look for good tenants. Second, investors should consider acquiring equity in rental property portfolios. Instead of one investor owning one property, multiple investors can own multiple properties together to achieve diversification and other benefits.
A favorable location allows the landlord to charge a higher rental rate. Renters earn higher returns due to an area that has a large population with relatively high incomes. In addition, it gives the opportunity to re-rent the property if something happens to the tenant. In general, the value of the property will be higher, but it will provide protection against falling prices and the potential increase in value when the property is sold.
If the market is in a downturn, some sellers and tenants have to cut prices while trying to lower rents.
Thus, when concluding Triple Net Lease, it is very important to understand and study your future landlord more closely, namely:
consider its investment rating;
analyze financial statements;
analyze the business and its potential in general;
willingness to sign a long-term lease agreement.
For both tenants and landlords, triple net renting can provide some benefits. The tenant has more freedom with their structure; they can customize their space for greater brand consistency without the capital investment of a purchase. Another advantage is that these leases tend to be quite flexible: limits on tax increases, insurance, etc. For a landlord, triple net renting can be a reliable source of income and comes with very little overhead. The landlord also does not have to play an active role in the management of the property.
Should you be concerned about paying these obligations for the property you are renting? Probably not. Net leases are most commonly used in commercial real estate rather than residential units. Residential tenants may be required to pay for some or all of the utilities and are often encouraged to purchase their own tenant’s insurance. However, the homeowner usually pays property and liability insurance, as well as property taxes.
In a triple net lease, the tenant agrees to pay property expenses such as property taxes, building insurance, and maintenance, in addition to rent and utilities.
Triple rentals tend to have lower rents because the tenant takes on more of the running costs of the property.
A one-time net commercial property lease includes property taxes in addition to the rent.
Double net commercial real estate leases include property taxes and property insurance in addition to the rent.
Triple grid rental property has become a popular investment vehicle for investors as it provides low risk, stable income.
In commercial real estate, a net lease is a lease in which the tenant is required to pay some or all of the taxes, fees, and maintenance costs of the property. A single net lease requires tenants to pay property taxes on top of the rent, while a double net lease usually includes property insurance.
What is a Good Cap Rate for NNN?