NNN properties, also termed Triple Net properties, are the most popular type of commercial real estate property leased to a single tenant or multiple tenants. During the lease term, the tenant is solely responsible for paying the three “nets”. These are real estate taxes, insurance and maintenance and repair expenses that pertain to the leased property. The owner of the property or the lessor is mostly always responsible for the structural components of the building like the foundations, walls, HVAC and the roof.
A NNN Triple Net Lease is different from the Double Net or NNN Lease, where the tenant pays the taxes and the insurance, but not any maintenance expenses. At the other end of this lease spectrum is the Gross Lease, where the Landlord, not the tenant, bears all taxes, insurance and maintenance expenses related to the property. For example, if an landlord, earns gross rent of $100, and bears all tenancy expenses i.e. taxes, insurance and maintenance of $20, the net income to the landlord is $80. Under a NNN property lease, the landlord gets to keep the $100 in gross rent, that’s the big difference.
The bottom line is: always understand the lease despite any labels such as Gross, Modified Gross, Full Service, Double Net, Absolute Triple Net or Triple Net, which are commonly used by brokers and landlords. These labels can often be at the odds with the legality of the actual lease. Thus, the NNN property investor needs to understand what expenses will be truly borne by either party to the lease. The effect of all of this, even if, in a real world, the gross rents are lower for a NNN property, and therefore the Net income almost similar to a Gross Lease property, is that the risk of (fluctuations in) property operating expenses is shifted from landlord to tenant!
It is impossible to speak of income, and return from investing, without discussion about the other risks of such return. The ownership of NNN property – wrongly considered, risk-free – contains inherent risks. The most important and primary risk is tenancy risk – which can be reasonably interpreted by the credit rating assigned by a rating agency (national grade tenants). For national grade tenants like a CVS or Starbucks, it may be an easier exercise than the interpretation of credit of a regional player like, say a Bojangles or Sheetz. It will always be more challenging to understand the credit of a local player such as a Chinese take-out chain, though! An associated risk is re-leasing risk, such that when the property should be vacant, how easy or difficult a task is it to re-tenant the property? Typically, the re-leasing risk is shifted to new owners of a NNN property, since such properties typically sell in the concluding parts of their lease terms.
Therefore, the primary advantages of NNN Triple Net Lease property are: (a) a predictable revenue stream due to the nature of the lease, and (b) a hassle-free investment due to passive, management requirements.
In this article we defined a NNN lease in context of the most common commercial real estate leases (predictable revenue). We also discussed misconceptions about the NNN lease, and also reviewed some risks vs the rewards of NNN investment properties. Call your expert advisor at Triple Net Investment Group today, and discuss your interest in NNN investment property. predictable revenue
