Ah, the NNN Lease, or Triple Net Lease—a favorite buzzword amongst commercial real estate professionals.
If you don’t know what a triple net lease (NNN) is, don’t worry—despite the popularity of the NNN lease, the term and lease structure is still commonly misunderstood across the industry. Below, we examine what triple net leases actually are, when they’re used and why they’re so 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 most operating expenses associated with a property’s records during their lease period.
The triple net lease is considered a turnkey investment, as the landlord is not responsible for paying the operating expenses. Expenses are usually tacked on to rent and utility payments, and can include costs such as real estate taxes, maintenance fees, and building insurance.
In triple net leases, tenants take over full responsibility over costs, which can be very beneficial for both parties (the tenant and the building owner). But before we get into the ins-and-outs of how these work and why they’re important, it helps to have a general understanding of the world of commercial real estate leases.
Types of Commercial Real Estate Leases
The world of commercial real estate leases and how they all function is wide. For brevity’s sake, we’ll try to keep it simple.
Typically, commercial real estate leases fall along a spectrum ranging from absolute net lease to absolute gross lease.
Absolute net leases are typically long-term leases where the tenant is responsible for all expenses plus building repairs. This can include anything from replacing the roof or renovating the HVAC system.
Absolute gross leases are the opposite—the landlord is responsible for all expenses.
But, commercial real estate isn’t a binary world. The vast majority of commercial leases fall somewhere between the two leases and are considered a hybrid lease.
So, when most people talk about a triple net or NNN lease, they are usually thinking about an absolute net lease. However, just because a lease is called or labeled an NNN lease, does not mean it’s actually an absolute net lease.
For example, when a building is brand new the tenant may indeed 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.
The most important thing to remember when working with commercial real estate leases is to read the entirety of the lease. 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 tend to conflict with the actual terms of the lease.
Understanding Triple Net Leases
Like any complex, commercial real estate term, triple net leases are multifaceted.
Without going into all the nitty-gritty nuances, below are the basic elements you should know about triple net leases including what they incorporate, their common misconceptions, benefits and risks.
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.
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, which is 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. What fees 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.
Triple Net Lease Investment Benefits
There’s a reason triple net leases are popular lease structures amongst landlords.
For property owners, the primary advantages of triple net lease investments are a predictable revenue stream due to the long-term leases and pass-throughs, as well as a relatively hassle-free investment due to the low management requirements.
Other benefits landlords can capitalize on include…
- 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.
To reiterate, each and every lease is different. But 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.
NNN Lease Investment Risks
It’s important to note that triple net leases are not risk-free. While triple net investments do offer an array of compelling advantages, there are still several risks that should be taken into consideration.
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 triple net 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
Interested in investing in triple net lease properties? There are a number of ways you can go about finding them.
First, 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, a tool like Reonomy, the market’s leading provider of property intelligence, can be even better.
Reonomy allows you to search the country’s entire off market scope of property. 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. For more information on finding triple net lease property for sale, read our full blog here.
Overall, triple net leases can be very beneficial options for property owners. From limited expenses to stable revenue, investing in a triple net lease property can be a lucrative decision for any level of investor.