Ah, the NNN Lease, or Triple Net Lease—a common buzzword amongst commercial real estate professionals.
If you don’t know what a triple net lease (NNN) is, don’t worry—below, we examine what triple net leases actually are, when they’re used and what makes them popular.
What is a Triple Net Lease?
Simply put, a triple net (NNN) lease is a lease structure where the tenant (usually in a single-tenant building) is responsible for paying a building’s operating expenses during their lease period, in addition to rent.
Expenses are usually tacked on to rent and utility payments, and can include costs such as taxes, maintenance fees, and building insurance.
The triple net lease is considered a turnkey investment, as the landlord is not responsible for paying the operating expenses.
A tenant taking over full responsibility of costs can be very beneficial for both the tenant and the building owner/landlord.
What to Know About Triple Net Leases
When most people talk about a triple net or NNN lease, they are usually thinking about an absolute net lease.
Just because a lease is labeled a NNN lease, that doesn’t mean it’s always an absolute net lease, however.
For example, when a building is brand new the tenant may be responsible for funding replacements such as the roof or HVAC systems as they wear out over time.
However, on older buildings, a lease can be called triple net but actually require the property owner to fund these capital expenditures over time, rather than the tenant.
Triple net leases are multifaceted, and can be complex, so the only way to truly understand the terms and conditions of a lease are to actually read every detail.
Simple labels like triple net, full service, or modified gross, which are commonly used by brokers and property owners, can conflict with the actual terms of the lease.
Below, we’ll go through the basic elements you should know about triple net leases.
1. What a Triple Net Lease Includes
As we mentioned before, tenants who rent under triple net leases are responsible for the majority of the expenses associated with their property.
At the very basic level, triple net leases include property taxes, maintenance expenses and insurance premiums on top of rent. The tenant is granted almost full responsibility over the property from the financial role they take on.
A triple net lease also usually includes low base rental prices.
Given the amount of the expenses tenants agree to pick up, many times, the base rent they pay is lower than if they were to accept another type of lease.
2. What a Triple Net Lease Does Not Include
A common misconception is that even a true absolute net lease covers ALL expenses associated with a property.
That’s not always the case.
While a true absolute NNN lease with a strong tenant can be thought of as a turnkey commercial property from the landlord or investor’s perspective, even an absolute net lease has some expenses that won’t be covered by the tenant(s).
For example, it’s rare for an NNN lease to cover the accounting costs charged by the landlords CPA or legal costs charged by the landlord’s attorneys when drafting or reviewing documents.
While these costs are fairly small relative to the purchase price of a property, they are still not typically covered in a standard “NNN lease.”
Again, these differ amongst landlords and leasing companies around the world.
The fees that are typically excluded from a triple net lease structure are subjective to the parties involved, however, in most cases, smaller fees, like legal and listing costs, are not the responsibility of the tenant.
3. Investment Benefits
There’s a reason triple net leases are popular lease structures amongst landlords.
The primary advantages of NNN leases on the lessor-side of things are:
- Predictable revenue stream due to long-term leases and pass-throughs.
- Less management – landlords can rest easy when it comes to management since tenants are responsible for resolving issues themselves.
- Lower prices – typically, single tenant buildings cost less than those that house multiple tenants.
- More financing options – loans are determined based on the value of the asset and the credit of the tenant, so financing options are more available.
Generally speaking, those who invest in triple net lease property can benefit from a stable, additional revenue stream that doesn’t cost a ton of time, resources and energy.
4. Investment Risks
Triple net leases are not, of course, completely free of risk.
First, because most triple net lease investments are for single-tenant properties, tenant credit risk should be considered.
For example, not many today doubt the strength of a triple net Walgreens investment since the lease is guaranteed by the parent company—which is publicly traded and financially strong.
But it is possible for a financially strong and publicly traded tenant to fall out of favor over the term of the lease and ultimately go bankrupt.
Since single tenant triple net properties are either 0% vacant or 100% vacant, this risk should be taken into consideration.
Another risk to consider is re-leasing.
Many NNN investment properties are sold towards the end of a longer-term lease, shifting the risk of re-leasing the property to the new property owner.
If the new owner does not have the skillset or a strong team to handle this, then this could present considerable tenant rollover risk.
Assessing Tenant Credit Risk in a Triple Net Lease
A lease is only as strong as the tenant behind it, so analyzing the financial statements of the tenant on the other side of the NNN lease is critical in understanding downside risk.
Many single tenant triple net lease deals involve publicly traded companies such as Starbucks or Walgreens. In these cases, it’s easy to pull up credit ratings on the companies’ bond issues and to also read stock analyst reports.
For private companies’ credit analysis requires some more effort, but analyzing financial statements and trends to better understand credit risk is a worthwhile endeavor.
As with most decision making in commercial real estate, understanding the risks involved and taking the necessary steps to mitigate those risks is an important step in weighing triple net lease options.
Finding Triple Net Lease Investment Properties
If you’d like to own an asset with triple net lessees. there are a number of ways you can go about identifying and analyzing a lucrative investment.
Sales listings can be a good place to start.
Commercial real estate listings websites like LoopNet make it easy to see exactly what’s on the market across the country.
But if you want to expand the realm of investment possibility, you can search off-market.
Reonomy allows you to search the country’s entire off-market scope of property, with property intelligence features that allow you to glean actionable insights on properties, owners, and tenants.
Using powerful filters, you can streamline your property search on elements like asset class, tenants and location to find the exact type of triple net lease property you’re looking for.
From there, you can view property details and unlock accurate, up-to-date contact information for current owners, so you have everything you need to reach out and strike your next triple net lease deal.