Triple net investing is a crucial part of net-lease investment growth in the United States. According to CBRE, for the year ending in Q2 2021, net-lease investment surged by 3.1%.
In September 2021 net-lease investment volume in the United States increased by nearly 90% year-over-year in the second quarter of 2021 to $18.7 billion.
Conversely, the total commercial real estate investment volume fell by 1.7%. These figures show that net-lease investment is becoming more attractive to investors.
In this post, we explain what triple net investing is, the different types, how to calculate the cap rate, and how to buy NNN properties.
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A triple net lease (also called NNN) is a rental agreement on a real estate where the lessee agrees to handle the expenses that come with the property.
Some of these expenses include property taxes, building insurance, and common area maintenance (CAM). Keep in mind that these expenses will be paid alongside other costs of the lease and utilities.
An NNN lease differs from the standard commercial rental agreement, where some or all of the above-mentioned payments are handled by the landlord.
As a tenant, you must understand what you are signing. Understand that you need to pay rent and utilities plus all the expenses of the property, including real estate taxes, building insurance, and maintenance.
As the landlord, it’s also essential to understand what you are offering. The lessee will handle expenses of your property, including real estate taxes, building insurance, and maintenance. The lessee also pays rent. Hence, you have to look out for tenants that can pay rent and handle the other expenses that come with your property.
In addition to NNN, there are other types of commercial property net leases in triple net investing:
An NNN lease works when a commercial property owner leases a building or a space to a tenant. However, unlike regular leases where the taxes, insurance, and common area maintenance are added to the rent amount, the tenant handles all these extra payments individually.
In commercial lease agreements, the landlord is either responsible for some extra costs or pushes them to the tenants at a higher rate.
However, with the NNN lease, the tenants handle all these extra payments.
When a property owner rents out a building to a business using the NNN lease, the lessee will pay the building's real estate taxes, insurance, and other maintenance costs during the lease period.
Since the lessee is handling these costs, which is the responsibility of the property owner, the rent charged for the NNN lease is generally lower compared to the rent charged in a regular lease agreement.
The capitalization rate (also known as cap rate) on NNN leases is what the owner expects in return on a commercial property. To calculate the NNN lease, add the annual real estate taxes and the insurance for your building. Divide the figure by the total square rental footage of your building.
Next, look at the maintenance costs to analyze the likelihood of their increment within the lease period. After reaching a suitable figure, divide the resulting amount by the property’s amount of square rental footage.
Keep in mind that if you’re leasing an entire building to a single tenant, it’s easier to calculate the triple net lease amount. However, if you have multiple occupants on a single property, consider the maintenance of some common areas like the bathroom.
You’ll need to calculate the annual costs for utilities, cleaning, and supplies. Divide the total annual costs by the number of square rental footage in your property.
Finally, add the totals for the real estate taxes, insurance, area upkeep, and CAM.
Divide the total sum by 12 to get your monthly cost. To get the NNN lease amount for each space, add the monthly outlay, the monthly rental sum per square foot, and multiply it by the number of square feet a tenant is leasing. This will give you the monthly NNN lease amount.
In addition to the NNN lease properties, there are other types of lease properties. They include:
In Single net properties, tenants are responsible for paying the property taxes in addition to rent and utilities.
Double net lease properties are where the tenants pay the building’s property taxes and insurance in addition to the rent and utilities. A double net lease is a rental agreement whereby the tenant agrees to cover the costs of two of the three primary property expenses: taxes, utilities, or insurance premiums. Also known as a net-net (NN) lease, these are most commonly found among commercial tenants.
Here, the tenants pay property taxes, building insurance, and CAM expenses.
In the absolute NNN lease, tenants pay for everything building-related. The payments include significant repairs, rent, utilities, property taxes, and building insurance.
The cap rate is the return from the rental income minus expense.
The cap rates tend to vary depending on the geographical locations. However, cap rates can range anywhere from 4% – 7%.
The typical criteria which determine the cap rates on triple net leases are:
The double net and triple net leases are two of the most popular commercial real estate leases. However, they differ in certain aspects. Here are some of the primary differences: