What Obligations Does a Landlord Have Under a Triple Net Lease?
There are several types of commercial real estate leases because there is no common lease template or standard form at the state or national level. Unless you are dealing with the same landlord on the same property, the chances of seeing a lease agreement that is even somewhat identical to a previous lease agreement are quite unlikely. The term of a lease also varies greatly, and shorter is not necessarily preferable. All of this emphasizes the importance of knowing the terms and conditions of a lease agreement.
A triple net lease is one of the most common leasing structures (or NNN).
A triple net lease, a double net lease, a single net lease, a full-service lease, or even a gross or modified-gross lease all specify who is liable for things like taxes, insurance, and common area maintenance. As you can think, this has a substantial influence on the overall cost of leasing the property.
What is a triple net lease?
A triple net lease, often known as a NNN lease, is a common commercial real estate leasing structure. A condition of a Triple Net Lease stipulates that the tenant is responsible for certain expenses associated with the property’s operation in addition to the basic rent. These costs are divided into three “Nets.”
Each “N” or “Net” represents:
Net = Property Taxes
Net = Insurance
Net = Operating Expenses
Operating expenditures, often known as CAM – Common Area Maintenance, are the costs associated with running the property. Repairs and maintenance charges, garbage removal, snow removal, landscaping, parking lot upkeep, security and fire safety, elevator maintenance, property management, external lighting, and other fees are included.
Utilities and cleaning services may also be included in the Operating Expenses or CAM, depending on the property. With a Triple Net Lease, you usually pay the landlord one check every month, but that check is divided into two parts:
The Monthly Base Rent
The Net Triple Amount (or NNN)
Why are triple net leases popular?
Triple Net leases are the most often seen kind of lease in retail assets, modern medical office buildings, hospital campuses, and the bulk of classic office buildings. A Full-Service Lease is the most prevalent kind of lease, followed by Gross Leases and Modified Gross Leases.
Triple Net Leases are widely used for a variety of reasons. They are simpler to get for renters since they relieve the landlord of part of the responsibility of property management and investment, such as building insurance and maintenance costs. Because the renter bears at least some of these costs, they may negotiate a lower monthly rent for the basic lease rate.
The main benefits of a triple net lease
Low-Risk Investments
Since the tenant is responsible for almost all costs associated with the property, from taxes and insurance to regular maintenance costs, a triple net lease agreement is a fairly low-risk investment for the investor.
Increase capital
Leasing on a triple net lease basis is often added to investment portfolios as a conservative, low-risk strategy to raise capital. In addition, investors may decide to sell the property when the market peaks, population growth, or when they are ready to use that capital in their next investment.
Long term residence
Most triple net leases have a long-term tenant structure (over 20 years). This is beneficial for landlords as it eliminates the risk and loss of property that is left empty between tenants.
Constant stream of income
A triple net lease can provide an investor with a stable source of income. This type of lease is structured to include a fixed amount of rent every month for an extended period of time. In addition, much of the unknown or catastrophic real estate costs will be passed on to the tenant, helping to protect any risks in the investment.
Tax incentives
Since the tenants of the three net leases are responsible for paying property taxes, they can include these costs in their business expenses and receive some tax credits for their business.
What is the landlord responsible for in a triple net lease?
You do nothing except collect rent from a huge firm as an “absolute triple net lease” investor and landlord while the tenant handles everything. Most investment-grade firms, such as Dollar General, Walgreens, and 7-Eleven, choose to operate under this sort of lease, which totally absolves the landlord of any financial or physical obligation.
It’s worth noting that some businesses use what’s known as a “modified NNN” or a double net (NN) lease. For example, Starbucks makes the landlord liable for the roof, building, and parking lot. If a purchase contract is completed, we do due diligence to determine the likelihood that these obligations would result in expenditures and landlord difficulties. They are often irrelevant.
What does the landlord pay under a triple net lease?
Even if your lease is a real absolute net lease, a widespread misperception is that it covers ALL expenditures connected with a property, which is not always the case. While a real absolute NNN lease with a solid tenant might be seen as turnkey commercial property from the standpoint of the landlord or investor, even an absolute net lease contains certain expenditures that the tenant will not pay.
An NNN lease, for example, is unlikely to cover the accounting fees imposed by the landlord’s CPA or the legal fees incurred by the landlord’s lawyers when writing or reviewing papers. While these fees are normally minor in comparison to the purchase price of a property, they are not typically covered by a regular “NNN lease.”
As you can see, when it comes to owning a triple net property, there are minimal, if any, landlord expenditures. Absolute NNN investing requires no landlord involvement, although other triple net investments may need minimal ownership duties such as the roof, building, and parking lot. Because most firms run on triple nets, leases are often pre-set and rather uncomplicated, providing a worry-free landlord lifestyle and guaranteed revenue.
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