Triple Net Properties Definition for Real Estate Investors

With ongoing fluctuation in the market and economy, it’s no wonder more investors are turning to lower-risk investments like triple net properties. In fact, net leases in the industrial sector alone increased 75% in 2021 compared to 2019. 

Net leasing commercial real estate not only allows for flexibility, but also greater opportunity in booming markets – especially if you don’t live nearby. Whether you’re looking to build a commercial property or acquire a new one, furthering your understanding of net lease properties can help you be prepared for the right opportunity.

Table of Contents:

What Is a Triple Net Lease?

Triple net leases (or triple net properties) are agreements between a commercial building’s landlord and tenant where the tenant accepts responsibility for property taxes, building insurance, and maintenance expenses in addition to rent and utilities. In some cases, the tenant or lessee may also agree to pay for structural upkeep. 

A triple net investment only differs from a single or double net lease by the amount of responsibility held by the tenant. Compared to tenants in triple net properties, tenants are liable for fewer operating costs in double net investments, and a single net tenant is responsible for even fewer.

Triple Net Leases Pros and Cons

Triple net properties provide great flexibility for those in the market for a secure real estate investment. Despite the low risk they pose compared to other investments, if you’re not willing to deal with the drawbacks of triple net leases, they may not be the right option for you.

Pros

Cons

  • Fewer responsibilities
  • Rollover Expenses
  • Greater opportunities
  • Tenant default
  • Predictability
  • Limited upside potential
  • Flexibility
  • Greater risk of liens

 

Understanding what you could lose from triple net properties is just as important as knowing what you could gain. Before jumping into the world of triple net properties, continue reading to gain a robust understanding of potential upsides and downsides.

Benefits of NNN Properties

Triple net properties come with a wide variety of benefits, each of which depend mainly on the investor’s goals and what can be negotiated with the tenant. Below are some of the most common benefits of NNN property:

  • Fewer Responsibilities: Because of the way triple net leases are set up, the tenant pays for a good portion of the property’s operating costs, leaving you more time and money for other investment opportunities. 
  • Greater Opportunities: Fewer landlord responsibilities means less time checking in on the property – allowing you to purchase properties in booming areas even if you don’t live close enough to check in every few weeks or more. 
  • Predictability: Most triple net properties are under long-term leases with tenants you know will pay rent and other operating costs typically for 10 or more years. 
  • Flexibility: Triple net leases are negotiable – if you’d rather the tenant pays a certain expense, while you handle another, it can be negotiated into the contract.

All of these benefits help to build a lucrative stream of income from real estate and diversify your investment portfolio. Utilizing NNN build to suit financing can further heighten your success by creating buildings that will attract your ideal tenant. Contact Revolution Realty Capital today to learn how we can provide up to 100% LTC financing for such commercial projects.

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Risks of NNN Investments

Now that you’re aware of the benefits of NNN properties, read through the following drawbacks to triple net properties. This will help you get a better sense of how this type of property could affect your real estate investment portfolio.

  • Rollover Expenses: Once a NNN lease has ended, there will likely be costs associated with getting the property ready for the next tenants. Additionally, if your previous tenant(s) didn’t fulfil their end of the lease agreement or notify you of problems with the building, you may find yourself having to pay a large sum for property repairs.
  • Tenant Default: If your property has only a single tenant and they default, you’ll be responsible for the loan payment and all operating costs until you can either find a new tenant or your current tenant corrects the default.
  • Limited Upside Potential: Net leases are often fixed arrangements with outlined rent increases each year. If the market increases faster than your specified increase, you could miss out on greater returns.
  • Greater Risk of Liens: Unless all operating costs are in the landlord’s name, there’s greater potential for missed payments when not all bills are the sole responsibility of either the tenant or the landlord. Checking for liens regularly can help mitigate this risk.

Although there are risks to triple net properties, by doing your due diligence you can mitigate many of them and run a successful net lease investment business.

Triple Net Lease Example

Look through the chart below to get a better idea of landlord and tenant responsibilities for a net lease vs triple net lease as well as other types of net leases.

 

Single Net Lease

Double Net Lease

Triple Net Lease 

Absolute/Gross Lease

Mortgage Payment

X

X

X

X

Property Tax

X

X

X

X

Building Insurance

X

X

X

Basic Maintenance

X

X

Structural Maintenance

✓/X

X

X = Tenant responsibilities 

✓ = Landlord responsibilities

 

Although each net lease type has differences, they are all the same in that the landlord and tenant split operating responsibilities in addition to the tenant paying rent and utilities. The biggest difference between a gross lease vs triple net lease is that the landlord is still responsible for a certain level of property maintenance.

Triple Net Lease Properties FAQ

Triple net lease properties can be complex until you’ve worked with them a few times. If you still have questions, look through the frequently asked questions below to deepen your understanding. 

What Is a Net Lease? 

A net lease is an agreement between landlord and tenant where the tenant agrees to pay certain operating costs of a property. This could include things like property tax, building insurance, and basic maintenance costs. Depending on the agreement, the tenant may also be responsible for taking care of certain aspects of the building’s structure. 

How Do You Calculate a Triple Net Lease?

When a building has more than one tenant, you can calculate a triple net lease monthly payment by adding the annual property taxes, building insurance, and average annual maintenance expenses. You’ll then divide that sum by the building’s total square footage. This will tell you how much to charge per square foot. 

After you know how much to charge per square foot, you’ll multiply the cost per square foot by the number of square feet each tenant is renting out. You’ll then divide this number by 12 to get the tenant’s monthly payment. 

Can You Negotiate a Triple Net Lease?

For both tenants and landlords, the responsibility split on triple net properties can be negotiated. Tenants can negotiate their base rent depending on certain liabilities taken on. On the other hand, landlords can negotiate certain responsibilities held by the tenant. Because of this, net leases can provide both parties with added flexibility. 

Are Triple Net Properties a Good Investment?

If you’re looking for an investment property with more flexibility and security than a traditional lease or property, triple net leases will likely be a good investment option for you. 

However, if you’re a landlord that likes to check in regularly and have full control over the operation and costs of your properties, triple net properties may not be the best investment for you. 

If triple net properties are what you’ve been looking for to round out your real estate investment portfolio, contact Revolution Realty Capital today to learn about the financing options available to you.

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