As a real estate investor considering your investment options, you may have encountered triple-net lease (NNN) properties. NNN investment properties include a lease agreement that places most of the financial responsibility of managing a property on the tenant rather than the property owner.
A triple-net lease provides property owners with unique benefits and risks. Understanding how these leases operate and the potential advantages and disadvantages of investing is crucial when considering adding a NNN property to your portfolio. Researching the fundamental aspects of NNN investment enables you to make an informed decision.
What Is a NNN Property?
A NNN property is a property for which the lease agreement specifies that the tenant must pay all of the property’s expenses, including real estate taxes, insurance, and maintenance. The term “triple-net lease” comes from the fact that the lease on a NNN property requires the tenant to pay those three property expenses. The tenant in a triple-net lease must also pay standard rent and utilities.
In simplified lease agreements, the landlord is responsible for paying some or all of the above property expenses. NNN leases are common with commercial properties like retail spaces, offices, and industrial buildings.
How a NNN Lease Works
A NNN lease works by shifting more responsibility to tenants than in other lease agreement structures. A net lease in commercial real estate is an agreement where the tenant will pay some or all of the property’s maintenance costs, taxes, and fees. Different kinds of net leases divide the property’s costs between the tenant and property owner differently.
NNN leased investment properties place the burden of paying insurance, real estate taxes, and property maintenance costs squarely on the tenant for the lease’s term. By agreeing to pay for these expenses, tenants assume more financial responsibility for the property’s upkeep and gain more control over the maintenance and operational responsibilities of the property.
Triple-net investment properties can also enable tenants to avoid being overcharged for utilities, taxes, or building insurance, which the landlord might tack on to their rent. Because the landlord is free of the obligation to pay these property upkeep costs, they typically lower the rental payments for tenants.
What Are the Responsibilities Under a NNN Lease?
Each party’s responsibilities in a NNN lease commercial investment are rigidly defined. Each party must meet its obligations as outlined in the lease agreement or face potential consequences like legal action. Here is a brief overview of the responsibilities described in a triple-net lease:
Landlords have fewer responsibilities in a NNN lease agreement, making triple-net investment properties potentially attractive to investors. Property owners must handle the following obligations for a NNN lease commercial investment:
- Collecting rent: While tenants pay utilities, insurance, and property taxes directly to the appropriate parties, they still owe rent payments to the property owner. Landlords are responsible for collecting rent from tenants on time each month.
- Mortgage payments: Property owners must pay the mortgage payments throughout the lease, which rental income will help offset.
- Inspecting the property for proper maintenance: Landlords want to ensure their properties are in good condition, including the structure and heating, air conditioning, and plumbing systems. Landlords may inspect their buildings periodically to see whether the tenant follows the maintenance contract.
- Creating a maintenance contract: Landlords may include a maintenance contract in the lease agreement to define the maintenance tasks the tenant must perform, the maintenance timeline, and other expectations.
- Structural issues: A landlord may still be responsible for covering any structural issues the property experiences, which include capital improvements such as replumbing a building or replacing an entire roof. These expectations should be outlined in the lease agreement. A net lease that places responsibility for the property’s structure on the tenant is called an absolute net lease.
Tenants bear a greater share of the financial responsibilities for a property under a NNN lease, including:
- Rent: Tenants must pay rent by the agreed-upon date each month. Since landlords don’t have to cover the property’s taxes, insurance, and maintenance expenses, rent payments are usually lower.
- Utilities: Building utilities like electric, gas, and water all fall under the tenant’s list of obligations in a NNN lease. The tenant pays the expenses to their local utility departments.
- Building insurance: Tenants may also pay for liability insurance if someone is injured on the property. The tenant may also list the property owner on their insurance policy, protecting the owner in case someone is injured.
- Property taxes: Tenants must pay real estate taxes for the property. If these taxes increase over the lease term, the tenant is still responsible for paying them. However, landlords and tenants may agree to a cap that transfers the additional tax burden to the landlord if it reaches a certain threshold.
- Maintenance costs: It’s also the tenant’s responsibility to maintain the property by paying for upgrades, renovations, and repairs over the lease term. Maintenance tasks may include landscaping, maintaining the parking lot, and repairing plumbing or HVAC issues.
Triple- vs. Single- and Double-Net Leases
Besides NNN leases, investors may also choose to use a single- or double-net (NN) lease structure. These three lease structures place varying obligations on landlords and tenants and may each be appealing to tenants in certain situations. When deciding what lease structure to use with your investment property, it’s helpful to have single-, double-, and triple-net leases explained to see the differences between each form.
Here are the main ways in which these leases differ:
- Tenant responsibilities: In a single-net lease, the tenant only pays for property taxes, rent, and utilities. A NN lease adds the obligation of paying insurance premiums. A NNN lease increases the tenant’s responsibility even more by adding maintenance costs. Some tenants may prefer a single-net lease since it places the least responsibility on them as possible within the limits of a net lease.
- Landlord responsibilities: In a single-net lease agreement, landlords must pay for the property’s insurance and maintenance expenses but not taxes. A double-net lease only requires landlords to pay maintenance costs. Triple-net leases give landlords the least financial responsibility by freeing them from paying taxes, insurance, and maintenance.
- Lease term: Single- and double-net leases generally have shorter lease terms, while triple-net leases commonly have 10- and 15-year lease terms. This trend is because the property owner in a triple-net lease agreement will be responsible for more expenses if the current tenant leaves. For this reason, fewer tenants may enter into triple-net lease agreements.
Advantages and Disadvantages of Investing in a NNN Property
As with any investment, triple-net investment properties have unique pros and cons that might make them more attractive to certain investors over others. Here are a few of the advantages and disadvantages of a triple-net investment: