As one of the most preferred lease structures used on the commercial market today, a Triple Net (NNN), or net-net-net, lease is known to ease the financial burden on investors by allocating property ownership expenses to tenants, or lessees.
Triple Net Lease:
Investors flock to the Triple Net Lease option for its ability to provide low-risk and long-term returns on often large commercial spaces that are utilized by a small number of tenants. A standard Triple Net Lease requires the tenant to pay base rent plus the cost of covering Common Area Maintenance (CAM), real estate taxes and insurance.
With this lease structure, landlords are off the hook for covering expenses that often result from property ownership. If you apply the concept to a commercial property that’s split between three tenants that generate an estimated $20,000 worth of maintenance per year, or $1,667 per month, cost to each tenant would be $556 to the tenant per month, for example.
Today, property owners have a variety of options to choose from when it comes to developing a leasing structure. A Double Net (NN) Lease, for example, requires the tenant to pay base rent, property taxes and insurance while a Single Net (N) Lease, requires the tenant to pay base rent plus property taxes. Finally, a Gross Net Lease, leaves all variable property expenses to the property owner.
While the Triple Net Lease option is preferable to many, it’s not always easy to identify how the three major components – including maintenance, tax and insurance costs – come together.
When it comes to paying insurance, always know that it’s going to benefit both you and the tenant, so a good policy is worth paying for. Commercial General Liability (CGL) coverage in addition to property and casualty insurance, among other things, are all common expenses that are issued to a tenant in a Triple Net Lease.
If you require tenants to carry insurance, consider who will pay for deductibles and uninsured damage as well. Additionally, while Triple Net Leases allow you to sign off on the cost of insurance, be prepared if a tenant falls through on a payment or chooses not to file a claim.
Like insurance, identifying who’s responsible for paying property tax is pretty straightforward when composing a Triple Net Lease. With a property tax, realize that the cost of appraisals can go up yearly, resulting in larger tax bills for the tenant. Get involved and contest the appraisal if you see fit – if your tenant chooses to vacate down the road, the tax burden will be left on you.
Finally, when it comes to allocating responsibility for Common Area Maintenance (CAM), know what all can go into the upkeep of a property. Consider the maintenance of lobbies, elevators and garages as well as heating and cooling expenses. Cost of security services, inspection fees, landscaping, broker fees, advertising and more can also be included under this category.
With so many items to choose from, it’s important to do your due diligence as an investor.
Stefanie Donahue is a freelance writer based in Bellingham, Washington. She’s a well-versed communicator with an extensive background in journalism and media production. Her writing draws from the insight of industry experts to uncover best practices for real estate investors.