Triple Net Lease Pros And Cons What Landlords Need To Know About NNN Leases
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If you’re looking at leasing commercial space, you have several different variations
of lease structures from which to choose. The triple net lease is one of the most attractive
for investors and landlords, but it also has it’s fair share of cons.
Here’s what landlords need to know about NNN leases.
The Pros Of A NNN Lease ________________
Minimal Landlord Responsibilities The three “nets” in a triple net lease
are common area maintenance, property taxes, and building insurance, which get passed through
to the tenants. Each tenant will pay their proportionate share
of these expenses and property management is often covered under common area maintenance,
meaning landlords will have minimal responsibility when it comes to expenses and maintenance
of the property. Because of this, it’s possible and fairly
common for investors to buy NNN properties across the country and not just in their back
yard. Long-Term Occupancy
Some triple net properties, especially single-tenant deals with national or regional credit tenants,
will come with longer-term occupancy. It’s not uncommon to find these properties
with 10, 15, or even 20+ year leases, depending on the type of property, tenant, build out,
etc. Landlords and investors find certainty in
the fact that they will be collecting rent for quite some time without having to worry
about replacing vacant units. Reliable Passive Income
Triple net leases are the epitome of “mailbox money.”
As far as passive income goes, NNN investments are among the top performing since the leases
are often guaranteed by tenants with strong credit that tend to stay in place for years
and years. If you have a property manager collecting
the rent and handling any issues with your tenant, then you’ll have very little else
to do with the property except for depositing those checks or handling tenant turnover when
the time comes. Leases Are Transferable
Similar to most other commercial real estate investments, triple net leases are transferable
between owners, meaning they can trade hands multiple times.
You could purchase a long-term lease, cash flow it for a few years, then flip it to the
next investor, who can use the same strategy. While commercial real estate isn’t the most
liquid asset class, it can usually be sold and transferred within a reasonable amount
of time if you’re needing to move capital to another project or cash out.
Protection From Expense Increases For many investors, this pro, alone, is the
reason they’ll purchase triple net investments. Since the expenses of owning and operating
the property are passed through directly to the tenants that benefit from it, if any of
these expenses increase, the landlord isn’t on the hook for covering the difference.
That means that if property taxes increase or your CAM is higher because you had unexpected
snow removal or other maintenance, your tenants will foot the bill.
The Cons Of A NNN Lease ________________
Limited Upside Potential Since triple net leases usually come with
long-term tenants at fixed rents, there isn’t much opportunity for a value-add investor
to increase the income potential and value of the property.
Now, that’s not to say it can’t be done at all - you’ll just have to wait until
that tenant moves out or the lease expires before you can make any updates and increase
rents. For the investors that are looking to place
capital in secure investments and benefit from passive income, this limitation for greater
upside isn’t a big deal. But for the value-add folks out there that want to push their yields,
it can be fairly unattractive. Turnover Risks
Single tenant net leases, especially, can be built out to accommodate the specific needs
of the current tenant, meaning that the space could be difficult to re-lease.
For the next tenant, the floor plans may need to be adjusted, roll-up doors may need to
be added in, and more - meaning it could get expensive to renovate the space for an incoming
group. You could also have a location that was only
ideal for that first tenant, adding to your higher rollover costs and difficulty finding
the next tenant.
So Should You Do A Triple Net Lease? ________________
I tend to lean towards and absolute yes on this one.
However, your lease structure can depend on other factors, such as the type of property
and how sophisticated your potential tenants are.
You’ll also want to have that conversation with your CPA and your attorney to see which
route works best for you. Triple net leases do come with many benefits
for landlords, which is why they’re becoming more and more common among not only retail
and restaurant spaces, but also office and industrial real estate.