One of the decisions commercial real estate investors (CREs) are often faced with is how to structure their commercial leases. There are many options, but property owners often offer their tenants triple net (NNN) leases when renting out their properties. This is a sensible strategy since NNN leases offer landlords and property investment owners several excellent benefits. In brief terms, triple net leases benefit both parties because owners can hand off paying various property expenses, and tenants receive lower monthly rent. If you're ready to dive into all of the benefits of this unique commercial real estate lease, keep reading to learn all about triple net leases.
What Does a Triple Net Lease Entail?
Triple net leases are relatively straightforward: the tenant pays base rent and a portion or all of a commercial space's ongoing expenses, including property taxes, insurance fees, and maintenance costs. Tenants often prefer this style of contract because it allows them to pay lower rent and increases their sense of ownership of the property. Not sure if an NNN lease structure is the right course of action when setting up tenant contracts? Before turning the idea down, explore these six benefits associated with NNN leases to help determine if this structure makes sound financial sense.
Enjoy Long-Term Occupancy
Minimizing tenant turnover is the key to success for almost every rental property. Tenants who sign NNN leases tend to be in it for the long haul. It's not uncommon for tenants to sign for 10- or 25-year (or even far longer) leases, which means investors can rest assured that carefully selected tenants will continuously occupy their space. Long-term occupancy also equates to spending less on marketing, interviewing, and onboarding new tenants. NNN leases help owners reduce the risks of vacant commercial properties, especially if they can sign a lease with terms that will likely exceed their investment period of ownership.
Guaranteed Consistent Passive Income
NNN leases are often preferred by tenants who plan to set up shop to run their businesses. Since there is essentially little worry about dealing with vacancies, property owners can focus on earning profits and other investment opportunities instead of recruiting tenants to fill their spaces. For those worried about inflation eating into profits, it's typically a non-issue because building modest annual rent increases (3% of the original rent is an accepted norm) into an NNN agreement is a commonly accepted practice.
Even the least expensive NNN opportunities can promise stable cash flow that provides uninterrupted cash flow and financial freedom when pursuing other investments. Even though the monthly base pay of triple net leases is lower, owners can keep more of it because they don't have to cover property costs.
Accept Minimal Responsibility
In a triple net lease, the three "nets" relate to property taxes, building insurance, and common area maintenance costs. This typically also includes capital expenses needed to make the property continuously useable. One of the prime benefits of using NNNs is the ability to enjoy freedom, or at least minimal involvement, from many of the responsibilities that come with day-to-day property management and ownership.
Instead, the tenant is responsible for paying expenses and maintaining the property (for multi-tenant occupied commercial spaces, all tenants share these responsibilities). The tenant will pay a lower monthly base with triple-net leases. Further, they're incentivized to keep the property in good shape since they're financially responsible for most maintenance tasks. With this type of hands-off ownership, investors often feel free to make investments extending to other geographical areas since they aren't required to be onsite to manage building problems.
Transferability Offers Flexibility
Unlike other commercial real estate investments, properties that come with triple net leases are transferable between owners, meaning owners can sell their properties without worries relating to their tenants or structuring sales around the end of leases. It's common for CREs to change hands multiple times with NNN leases in place.
This is a huge benefit for investors who might need to create an exit strategy or simply come across a more attractive and lucrative investment opportunity but need to transfer capital quickly. Investors purchasing the property will assume the same benefits as a commercial property, which is essentially a turn-key operation since reliable tenants are there. Sellers often find that NNN leases in place help them to sweeten the deal, making it easier to flip a property.
Conservative, Low-Risk Investment Strategy
Speaking of flipping properties, buildings with NNN leases enable investors to add conservative, low-risk investments to their portfolios, which means they enjoy the ability to create more equity. Once enough equity is built, they can strategically sell their property when market conditions set them up to earn a nice profit. Many will take that money and use it in a new investment opportunity – others may take the money for personal reasons, such as retirement.
Protection from Expense Increases
While CRE owners can build modest inflation increases into their NNN lease terms, one unpredictable element is how inflation or other market factors impact other expenses. With the NNN structure, owners relieve themselves from worrying about dealing with a sudden uptick in expenses relating to materials, labor, or other items associated with building improvements or insurance premiums. Thanks to the lower monthly rental base, tenants can budget for these expenses and even take action to keep them lower.
This can include other factors, such as costs, including snow removal or ice mitigation, which can be costly in a year that sees numerous winter storms. Businesses can't ignore these and other essential tasks since they need to protect themselves from liability if someone gets hurt. In other types of CRE leases, it can be costly for landlords to pay for these types of upkeep.
Is an NNN Lease the Best Option?
Anyone looking to be successful as a commercial property manager should consider a triple net lease. There are numerous tangible financial benefits to utilizing the NNN format. Still, like any other business decision, investors should explore other types of leases, including single net leases, double net leases, gross leases, percentage leases, and a subset of NNN leases – absolute NNN. What's best for an investor will depend upon their circumstances.
Triple net leases offer property owners the opportunity to enjoy stable, long-term CRE investments with the ability to work full-time jobs or focus on other investment opportunities. A hands-off property is appealing to many investors. To learn more about good CRE investment opportunities that feature NNN leases, speak to an experienced commercial real estate agent who can help steer you to the best properties currently on the market.
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