Since 2014, the popularity of the NNN lease has soared in the commercial real estate industry. Many investors see it as a safer investment, with a predictably stable source of income and offering more passivity with fewer responsibilities than other lease options. INCO Commercial reviews the features of a Triple Net lease as well as the benefits enjoyed by investors.
What is an NNN lease?
“Triple Net Lease” refers to the three net expenses of a lease: net property taxes, net insurance, and net maintenance (common area maintenance). In this lease arrangement, the tenant is responsible for these plus other operating expenses. Be aware, there is a caveat regarding triple net leases. Sometimes the term is misused or casually referenced and investors are led to believe that they have an almost entirely passive investment. For this we must distinguish between a ‘standard’ NNN lease and an Absolute NNN lease.
A ‘standard’ NNN lease stipulates that the tenant is responsible for the three net expenses, plus monthly rent; however, the landlord remains responsible for any building maintenance or repairs on the structure and roof.
In an Absolute NNN lease, the tenant is responsible for all of the operating expenses, plus any structural or roof repairs, in addition to the monthly rent. Since the landlord is not responsible for any of these operating expenses, an absolute NNN lease is considered a turnkey investment. Sometimes, it’s also referred to as a ‘bondable lease.’
Part of structuring the lease is negotiating what the tenant is responsible for as far as ‘operating costs’ and what the landlord will cover. These are referred to as pass-throughs and exclusions. Pass-throughs are operational costs that the landlord requires the tenant to cover. Exclusions are expenses for which the tenant is not responsible.
Even if your lease is structured as an absolute NNN lease, as an investor, you are never 100% free from all costs. For example, there will be regular accounting costs and possible attorneys’ fees if any legal documents ever need to be drawn up.
The cap rate for these leases is determined by the credit rating of the tenant. Additionally, NNN require investors to have a net worth of $1 million, not including the value of their primary residence. Smaller investors who don’t fit this criteria can invest in a NNN lease property by investing in a Real Estate Investment Trust (REIT).
INCO Commercial works on a client-by-client basis, and will review your individual circumstances as an investor to guide you in the right direction and maximize your bottom line.
Benefits to a NNN Lease
The NNN Lease is highly attractive to investors as it affords security, a stable income, and it minimizes the overall cost for the landlord. Tenants are responsible for most of the operating expenses, and investors can be involved in as much or as little of the day-to-day as they want.
Tenants are also attracted to NNN leases since the monthly rent is usually much less than a gross lease because they will be financially responsible for most aspects of the property.
Additionally, if properties under a triple net lease are ever sold, investors can move their capital into another triple net lease without having to pay taxes. (Make sure to read our next blog, “The 1031 Tax Exchange” to find out more about this kind of tax-deferred exchange.)
As with any property investment, it’s very important to perform due diligence. NNN lease properties are particularly important as their leases can last 10-15 years, sometimes longer. It is also important to evaluate the whole picture of the tenant to consider if they are beneficial to your long-term investment. Even if they have a great credit rating, it’s worth analyzing the health of the industry to predict whether their business will remain stable, grow, or possibly decrease in the near future. Additionally, some businesses may not even have a credit rating because they’ve never owed substantial debt. For example, in years past, Dollar Tree had no credit rating because it carried no significant debt. Yet their profits at the time were quite healthy with sales of over $3 billion.
INCO Commercial can help you vet the property, its history and all relevant details that could influence your decision to invest. We will ensure the property you ultimately choose is the best match for you and your interests.
INCO Commercial is committed to our clients and their individual needs and interests. We will work closely with you and help you find the investment to suit your portfolio. Each of our agents is deeply connected to Long Beach and surrounding areas; their intimate knowledge will provide you with the best options to match your interests. Please visit our contact page, or call 562.296.1362 for immediate assistance.