What Is a Triple Net Lease and How Does It Work?
A triple net lease (also known as a NNN lease) is a lease agreement in which the tenant or lessee agrees to cover all of the property’s expenses, such as real estate taxes, building insurance, and upkeep. These payments are in addition to rent and utility fees, and in the absence of a triple, double, or single net lease, the landlord is normally responsible for all payments.
Triple Net Leases: An Overview
If a property owner uses a triple net lease to lease a building to a business, the tenant is responsible for paying the building’s property taxes, insurance, and any maintenance or repairs the facility may require for the duration of the lease.
The rent charged under a triple net lease is often cheaper than the rent charged in a regular lease agreement because the tenant is absorbing these costs that would otherwise be the responsibility of the property owner. The creditworthiness of the tenant determines the capitalization rate, which is used to calculate the lease amount.
Investors that wish to add a stable cash stream to their portfolio through monthly rent payments from tenants prefer triple net lease real estate. A fundamental benefit of a triple net lease is that the tenant often bears the majority of the property’s operational costs, making it a low-risk, low-touch investment for a property owner with consistent monthly income.
However, because each triple net lease agreement is tailored to the specific property, there may be stipulations defining specific terms and financial obligations for both the property owner and the renter. If you’re buying a home that already has a triple net lease agreement in place, it’s critical that you grasp all of the major terms of the long-term arrangement (and will become yours upon purchase of the property).
Understanding all of the complexities of a triple net lease agreement will guarantee that you know exactly what you’re accountable for as the property owner and will prevent unexpected charges from affecting the profitability of your NNN property investment down the road.
What to Look For
Here are five of the most important things to look for in a triple net leasing agreement.
1. Monthly Rental Sum Agreement
As a property owner, you’ll rely on monthly rent payments from triple net tenants to supplement your income, so it’s critical to understand how much is agreed in the agreement and whether it will alter over time.
Many triple net lease agreements include fixed monthly rent payments for the duration of the lease, so you’ll know precisely how much you’ll make each month (and can include in how much profit you’ll make after paying down the property’s mortgage). However, in some circumstances,(although very rare) rent increases are incorporated into the lease agreement and will occur on a regular basis during the lease term to account for growing property value or anticipated expansion in the area.
2. Tax Responsibilities
Tax duties are also outlined in a triple net leasing agreement. Property taxes are often passed through to the renter to pay annually, but because each agreement is different, it’s crucial to make sure you fully grasp the tax requirements on the property so you don’t wind up liable for tax payments or fines you didn’t account for.
3. Insurance Premiums and Claims
In a triple net leasing agreement, the tenant is generally responsible for insurance premiums. On this particular factor, however, there is a greater degree of variation among deals. Some leases, for example, may provide that the tenant is responsible for obtaining and maintaining the applicable NNN insurance policies on the premises.
Others, on the other hand, may include clauses that delineate the many types of insurance policies and who is responsible for each.Make sure you understand your insurance duties in a triple net leasing agreement so you can figure out what, if any, costs you’ll incur for the policies you’re required to hold as a landlord.
4. Upkeep, Repairs and Maintenance
Ongoing upkeep expenses are another part of a triple net leasing agreement that may vary based on what is discussed. While most main running expenses are covered by net lease renters, each agreement will specify how certain upkeep costs are split between the landlord and the tenant. For example, the tenant may be liable for general upkeep, repairs, and maintenance, but the landlord may be responsible for all or part of the costs associated with triple net lease major repairs to the structure, such as the roof and frame.
5. Utilities and Janitorial Costs
In a triple net agreement, tenants normally bear all of the costs for utilities and cleaning services, although there are times when these fees are negotiated as a shared cost between the tenant and the landlord. Any monthly expenses you commit to paying on a property will be deducted from your profits, so find out if a triple net leasing agreement includes these charges up front so you can incorporate them into your decision.
Why should you sign a triple net lease?
Tenants pay less rent when they sign a triple net lease than when they sign a gross lease. When it comes to a gross lease, landlords often include the cost of repairs and maintenance charges into the rent, and they are highly likely to add a safety margin in their estimations. If no building maintenance is necessary throughout the lease period, the money stays in the landlord’s pocket.
While this may appear to be enticing, keep in mind that it is a two-edged sword. With a triple net lease, tenants take on extra risk because they are responsible for any repairs that may be required throughout the term of the lease. This also means that if the building is in good shape and requires little upkeep, tenants can save money. However, tenants who rent a structure that requires extensive repairs may find that NNN leases are more expensive than gross leases.
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