What Is an Absolute NNN Ground Lease?
When a business owner starts to search for a specific place where they can create a working space, or for commercial purposes, they will come across diverse real estate terminology that requires additional explanation. In this review, we’ll outline one of the most widespread types of lease called NNN lease, an NNN ground lease in particular.
Although, let’s say several words about the triple net lease generally and define its peculiarity. There’s no difference whether it’s a single, double, or triple lease agreement, we can indicate who is responsible to pay for area maintenance, insurance, and fees.
An NNN lease is an agreement between a landlord and tenant, when the latter is obliged to pay for property maintenance, expenses, and taxes, along with the set rental rate. So, a lessee has to pay the rental obligation (that is gross rent) each year including predefined rent and the above-mentioned operating expenses.
It’ll be a great advantage of being qualified enough in net lease types and its pros and cons for a lessee and lessor. Although, if you have some difficulties in grasping the details, you’d better find a professional attorney who will support and represent you when reviewing the signed contract conditions.
Finding an experienced representative will benefit you: you’ll get peace of mind and manage to save costs from lower rental fees or some concessions. In this net lease agreement, a landlord benefits greatly compared to a tenant, because all the money comes into a landlord’s pocket, while a tenant is responsible to pay all the operating expenses.
From a tenant’s perspective, an NNN lease offers such an advantage – in case a landlord overestimates the operating expenses, a lessee doesn’t have to pay the rate. However, besides rental taxes, maintenance, and other fees, a landlord can provide a tenant with some incentives to encourage them to sign a lease.
For instance, a tenant improvement allowance that means a dollar amount for a square foot for any business goal you want to fulfill (a space for offices, retail shops, restaurants, etc). These costs cover lighting, flooring, paint, landscaping, fire safety, and other common area maintenance.
A great plus of an NNN lease for a tenant is the ability to secure it and get a lower rent rate due to your credibility, solid financial background, and payment history. However, a lessee has to be always ready for additional obligations connected to the occurrence of natural disasters or system failure. These situations will require you extra expenses for repair and pay bigger rates for utilities and house rent generally.
A Mechanism of an Absolute NNN Ground Lease: Pros and Cons for Tenants and Owners
So, what about an absolute NNN ground lease, and what ins and outs it can bring to a tenant and landlord? For investors, this type of lease is an extra alternative source of passive income that will flow regularly each month. It also excludes any extra funds payment from a landlord’s pocket in case of unexpected occasions (natural disasters), accomodation repairing, etc.
Compared to the absolute triple net lease, an NNN ground lease is an agreement that focuses on the ground or land lease. This is a contract when a tenant leases the land to build a house for specific purposes, so he becomes an owner of the built accommodation and is responsible for all expenses for its maintenance.
It includes all costs for building structure, everyday operations, repairs, and utility provision. Speaking about an investor or an owner, then they’re obliged to pay annual property taxes and that’s all their responsibility.
An interesting fact about the NNN ground lease is that it’s a long-term contract that can be signed for at least 50 years and more. In case a lessee can’t or suspends payments for the ground lease, or the date of the contract expires, a landlord converts a tenant’s property.
Let’s look at what perks and difficulties an absolute triple-ground lease assumes both for a lessee and landowner. Since an absolute NNN ground lease concentrates on the land issues, the ground is charged for rent. While any changes are made with a new building, including repairs of constructions or any improvements, then it’s everything within the responsibility of a tenant.
Among the benefits of the NNN ground lease are the following:
A landlord can control the purposes their property can be used for, as well as the way of its development.
Since it’s a long-lasting agreement, it brings more appreciation for investment, so it’s considered to be a low-risk lease.
An owner can trade with a lower capital rate because of the absence of capital expenditure obligation. So, a landlord doesn’t have to report on some capital gain in the future.
It’s valued higher than a lease contract with land and property.
No need for active control for a landlord to have stable passive profit.
Now, move to the ground lease disadvantages:
Any deterioration of property is a responsibility of a lessee.
Reversionary condition that means when a lease has expired, its termination, or if a tenant defaults, all accommodation improvements and property itself go back to a landlord.
There can be some restrictions for property building that can be constructed on leased land. So, to gain the expected project success, a tenant should check the local rules necessary to follow to run a business.
Because of its long-term nature, sometimes a ground lease can be more expensive than buying the ground at the beginning without its lease.
To conclude, it’s needed to say that an absolute NNN ground lease will fit mostly conservative investors who want to maximize their income with high returns with zero risks. This is a kind of stable and absolutely predictable agreement without investment risks for landlords, and a perfect opportunity for tenants to rent land in beneficial conditions for the long term.
Indeed, it’s a simple contract signed between a tenant and investor (a landlord) when a lessee is obliged to pay a predefined rental cost each month, instead getting the right to build accommodation for particular purposes to fulfill their projects.