Lower Costs, Higher Income, Fewer Headaches - The Beauty of the Triple Net Lease
Lower Costs, Higher Income, Fewer Headaches - The Beauty of the Triple Net Lease
Ol' Grandpa used to say, "There's more than one way to skin a cat," and nothing illustrates this pearl of wisdom better than the triple net lease. Unless Grandpa was ahead of his time, I am sure he wasn't speaking about this exactly, but by offering a variety of lease options on the right piece of commercial real estate you can drastically expand your real estate horizons.
A NNN(triple net) lease is one where the tenant pays more than just rent. They cover some or all of the expenses that might otherwise take away from the income of the landlord. Thus, what you have left over is the net income, and after you pay the mortgage pure profit.
In a SINGLE net lease the tenant covers real estate taxes in addition to their rent.
A DOUBLE net lease is the same thing but the tenant also pays for insurance.
But the best option, for you the real estate investor, is the TRIPLE net lease. In the NNNlease, the tenants pay for real estate taxes, insurance costs and maintenance.
The true value of triple net leases comes in their effect on the valuation of the property. In commercial real estate the property is worth a multiple of the income it provides. The more net income that a property produces, the more the property is worth. Therefore, by having your tenants sign a net lease you can lower your expense, reduce your risk, and increase your income and make the property worth more.
These leases are very popular amongst investors but work best only with certain kinds of properties. Multi-tenant industrial or retail pieces of real estate work best with NNN leases. Obviously this type of lease is not the standard for residential leases on property like apartment buildings. It would be hard to convince typical tenants to assume the risk of fluctuating or rising costs for taxes, insurance and maintenance.Instead, these costs are absorbed by the landlord and may be passed on to the tenant indirectly through changes in his lease rate every year.
Since commercial leases are usually longer in duration than residential leases (5-10-15 years is not uncommon) it is more common to have the tenants pay directly for some of the property costs since the landlord cannot predict how they will fluctuate over time. That reduces risk for the landlord, and reduces probable expenses for the tenant.
What To Do If Your Commercial Tenant Won't Accept a NNNLease
Depending on forecasts for expense increases and your base rental level, you may find your commercial tenants aren't as excited as you'd like about signing a triple net lease. If you have tenants that are balking and need to fill vacancies in your building, you could always revert to a lease which passes fewer expenses on to the tenant. You must change your leasing policy as the market demands in order to maximize your occupancy and income.
The triple net lease illustrates the true power of commercial real estate investment. By saving your money and otherwise rounding up some cash for a down payment you can buy into a piece of property that will produce income for you as long as you own it. The tenants pay your mortgage through the rent, the costs through the net lease terms and leave you with just the profit.
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