The Ultimate Guide to Triple Net Leases: A Lucrative Investment Option

CEO Khai Intela
Triple net lease properties have emerged as a top choice for investors seeking profitable returns from commercial real estate. These properties, also known as NNN lease properties, have gained popularity, particularly during the pandemic, as...

Triple net lease properties have emerged as a top choice for investors seeking profitable returns from commercial real estate. These properties, also known as NNN lease properties, have gained popularity, particularly during the pandemic, as they offer higher yields compared to bonds and other investments.

What makes triple net lease properties attractive is their ability to provide a stable income stream while requiring limited involvement in property maintenance. This investment trend is not limited to the retail real estate market but extends across all sectors of commercial real estate.

To help you navigate the world of net leases and understand the potential of investing in net lease properties, we have prepared this Ultimate Guide to Triple Net Leases. Here, we will define what a triple net lease is, explore its pros and cons, and provide insights into triple net lease properties.

Types of Commercial Real Estate Leases

Before delving into the specifics of triple net leases, let's first explore the different types of commercial real estate leases:

1) Gross Leases

In a gross lease, the tenant pays a fixed rental amount, while the landlord covers all regular operating expenses such as taxes, electricity, and water bills.

2) Modified Gross Leases

Similar to a gross lease, a modified gross lease requires the tenant to contribute to some of the property's operating expenses, in addition to the base rent.

3) Net Leases

A net lease places the responsibility of base rent and one or more of the property's expenses on the tenant. The specific expenses covered depend on the type of net lease.

Each lease option has its advantages and disadvantages, which should be carefully considered on a case-by-case basis.

Understanding Net Leases

Net leases encompass three variations: single net lease, double net lease, and triple net lease. In a net lease, the tenant assumes responsibility for the base rent along with certain property expenses like taxes, insurance, and maintenance.

What is a Triple Net Lease?

A triple net lease, also known as NNN, is a lease agreement where the tenant agrees to pay the lease as well as all expenses typically associated with the property's owner. This type of lease transfers the burden of real estate property taxes, property insurance, and maintenance of the property and common areas (CAM) to the tenant.

Are utilities included in a triple net lease?

Yes, utilities are generally the tenant's responsibility unless stated otherwise in the net lease agreement.

What are examples of utility bills paid in a triple net lease?

Utility bills in a triple net lease typically include electricity, gas, water/sewage, garbage disposal, and may also extend to cell phone, telephone, and internet bills.

What happens with major repairs to a triple net lease property?

The responsibility for major repairs and maintenance costs depends on the terms outlined in the lease agreement. In a pure triple-net lease, the tenant typically assumes all repair and maintenance costs. However, it's not uncommon for leases labeled as NNN to assign responsibility for roof and structural integrity to the landlord. Careful review of the lease terms is crucial to determine each party's responsibilities.

Pros and Cons of Triple Net Leases

Like any business decision, there are pros and cons to consider when opting for a triple net lease agreement.

Pros for Tenants

From the tenant's perspective, triple net leases offer ownership-like control over property maintenance, insurance selection, and the ability to protest taxes. Tenants also benefit from potential rent discounts due to assuming property ownership responsibilities. It's important to note that triple net leases are generally applicable to standalone properties.

Cons for Tenants

The cons of triple net leases lie in the management tasks associated with organizing, contracting, and managing property vendors. Tenants must handle tasks like hiring landscapers, repairing companies, comparing insurance policies, and protesting taxes. Additionally, unexpected costs can arise during property occupancy, particularly in terms of tax liabilities and maintenance costs.

Pros for Investors

For investors, triple net leases provide a hassle-free investment experience with minimal management responsibilities. Investors benefit from a steady and predictable revenue stream, as tenants are responsible for utility expenses, repair costs, and sometimes even taxes. Triple net lease properties offer enticing investment opportunities with attractive yields, especially when combined with a 1031 deferred tax exchange.

Cons for Investors

One potential disadvantage of triple net lease properties is the reliance on a single tenant. If the tenant's business falters or becomes unviable, the investor may face challenges finding a new tenant. This can result in vacant periods without rental income and potential costs for property retrofitting.

Triple Net Lease Properties

Triple net lease properties have gained traction among commercial real estate investors due to their relatively low risk and higher yields compared to other options. These properties provide a consistent and guaranteed income stream through long-term lease agreements. The investor's management involvement is often minimal, making triple net leases an appealing investment avenue.

Typical net lease tenants are considered "recession-proof" businesses that offer essential services and goods, including grocery stores, restaurants, gas stations, and medical companies. Finding a net lease property with such tenants presents advantageous investment possibilities, with steady income flow and reduced chances of failure.

To explore triple net lease properties, investors can utilize online platforms like Crexi and LoopNet or seek assistance from investment sales brokers. N3 Real Estate, for instance, offers a portfolio of triple net lease properties in the retail real estate sector.

Triple net leases are often developed through build-to-suit agreements with the tenant. If you have any inquiries about triple net leases, net lease development, or general questions regarding restaurant and retail real estate, our retail real estate experts are here to assist you.

Investing in triple net leases can be a lucrative opportunity, providing a stable income stream and potential long-term returns. Consider the advantages and disadvantages, conduct thorough due diligence, and seek expert advice to make informed investment decisions in the realm of triple net lease properties.