A triple net lease is the most commonly used lease type in commercial real estate. People refer to it as a triple net lease because it covers three areas of expenses: taxes, insurance, and common area maintenance. Many landlords and tenants construct these leases in various ways. They often go through multiple rounds of negotiations between the landlord and the tenant. There isn’t a single template or standard form for all states or the country. You rarely see a lease agreement identical to another one. This is unless you work with the same landlord on the same property. All of this makes it even more important to understand the terms and conditions of leasing structures.
What does a triple net lease (NNN), a double net lease (NN), a single net (N) lease, a full-service lease, or even a gross or modified gross lease mean? Each lease type indicates who pays taxes, insurance, and upkeep in the shared areas. The responsibility for these costs significantly affects how the costs are recovered when managing a property. This blog post will explain how these terms affect the tenant and the owner.
Today’s blog explores the meaning of triple net leases and why you should consider them.
Understanding Commercial Real Estate Leases
As mentioned, there isn’t a single standard contract or form for NNN leases. Even for experienced professionals, finalizing leases can be complex. It is crucial to account for all the scenarios that could arise throughout a multi-year lease. To get ready, the best thing you can do is learn about the different types of leases and the promises and obligations that come with them.
First and foremost, you should always have a skilled real estate lawyer review any lease agreement with you. When signing a legally binding document covering multiple years, you want to ensure the terms are agreeable and address potential future complications.
Triple Net Lease Benefits for Landlords
Triple net leases are suitable for landlords in several ways, but the main ones are financial stability and fewer managing duties. Under these leases, the tenant is responsible for property taxes, insurance, and maintenance and repairs. For the owner, this means a more stable stream of income. It also means lower management costs and less involvement in the day-to-day running of the business.
- Landlords in the real estate business can achieve nearly passive income through NNN deals. But, to be clear, no investment is entirely passive. Depending on the specifics within the lease, the tenant may be responsible for covering the cost of most maintenance activities at their pro-rata share. Yet, the landlord or manager for the property will need to conduct common area maintenance reconciliation (CAM) at the end of the year. They must provide that to the tenant. CAM reconciliation can be one of the most complex activities with a commercial lease. If not done correctly, it may negatively impact your company’s finances.
- Landlords have more limited management work with triple-net lease properties. To be a good manager for your commercial tenants, you must establish a simple communication method with them that builds confidence and trust. One of the ways you can do this is through a tenant portal. A tenant portal allows them to pay their invoices easily. The tenant portal should offer options to submit maintenance requests, upload their latest certificate of insurance (COI), review their lease agreement, and check when rent increases take effect. Completing annual CAM reconciliations on time is also important, so tenants can budget accordingly.
- Most triple net leases are created for office, retail, or industrial tenants. They rent out prime sites and sign long-term contracts. Commercial tenants prefer not to move locations frequently because of the disruption to the business. The disruption arises when the tenant needs to communicate the change in location to their clients. Plus, there is the added cost of relocation. There is also downtime for the business during relocation and possibly harming relationships with nearby vendors or other related partnerships.
- Most triple net lease agreements are set up so that tenants can stay in the property for a long time. Landlords benefit from lease terms of 10 years or more. This is because they avoid the risk and losses that come with having a property empty between commercial tenants.
- Lenders are likely to give investors better financing terms if they sign strong tenants to a triple-net lease. Down payment ranges are based on the tenant profile, the borrower’s creditworthiness, loan type, and type of property. Convential commercial loans generally start at 20% or more in down payments. However, there are a number of factors that could increase or decrease this down payment.
- When the commercial property is sold, the triple net lease is transferred to the new owner. A strong tenant base with predictable income increases the attractiveness of the property to potential buyers.
Triple Net Lease Risks for Landlords
In a triple net lease, landlords face several risks, including potential loss of control over the property, reliance on the tenant’s financial stability, and reduced long-term earnings due to rent caps. Other risks include the need to reconfigure the property if the tenant vacates. There is also the potential for deferred maintenance or reduced property value if the tenant’s upkeep standards are lower than the landlord’s.
- Deferred Maintenance: In a triple net lease, landlords have less control over property management, maintenance, and branding. The tenant’s decisions about operations and maintenance might not match the landlord’s goal for the property. It could cause the quality and value to drop.
- Tenant Credit Risk: If a tenant’s financial health declines, the owner/landlord could be at risk for lost income or an unplanned vacancy.
- Rent Caps: Triple net leases have longer terms. The rent increases (also known as annual rent increases, escalations, step-ups, or scheduled rent adjustments) may not keep up with market rates or inflation.
- Property Re-leasing Risk: If the tenant moves out and customizes the space in a way that makes it challenging to place new tenants. The landlord may need to invest significantly to modify the space.
- If the tenant leaves, the owner may have to change things around to make it more appealing to other people who want to rent. This could cost a lot of money. Furthermore, if a house is empty, the owner might not be able to make any money while still having to pay the rent and other bills.
Manage Triple Net Lease with STRATAFOLIO
Investors or owners who want to buy real estate with low risk and relatively little maintenance should consider triple net leases. With real estate lease accounting tools like STRATAFOLIO, you can take your lease management to the next level. Our lease tracking software is designed to eliminate costly errors and automate CAM reconciliations. Plus, it integrates with QuickBooks, removing most manual entry. Schedule a demo right now and see how STRATAFOLIO could positively impact your company!
