Triple Net Lease Pros and Cons: What Landlords Need to Know
If you’re a commercial landlord, you may be wondering if a triple net lease is right for you and your real estate properties. Also styled as a “NNN lease,” there are plenty of reasons why landlords and investors choose this lease structure. After all, they’re literally “nothing but net.”
However, there are also some negatives. So let’s take a closer look at triple net lease pros and cons to help you determine whether this strategy would work for your commercial property.
What Is a Triple Net Lease?
A triple net lease is an agreement in which the commercial tenant agrees to pay all property expenses in addition to the rent and utility bills. These expenses can include major and minor repairs, routine maintenance, property insurance, and real estate taxes.
Because the tenant is footing the bill for all of these costs, NNN lease landlords typically don’t charge as much base rent as they would with another lease type.
Triple net leases are popular with commercial real estate investors because they provide a relatively hands-off, low-risk, long-term way to profit as a landlord. Who wouldn’t love that? But they also require a good deal of trust in the tenant.
Other types of net leases
Net leases are lease types in which tenants must pay additional building expenses in addition to rent. They’re popular in commercial real estate because they reduce the responsibilities of the property owner.
Aside from the triple net lease, the other most popular type of net lease is the double net lease (or NN lease). Here, the tenant pays real estate taxes and insurance premiums as well as rent. The property owner covers all maintenance costs.
A less common lease type is the single net lease (or N lease), in which the tenant is responsible only for property taxes in addition to the base rent. The landlord covers all the other stuff.
Triple Net Lease Pros for Landlords
You’ll enjoy minimal landlord responsibilities
Most of the responsibilities for a triple net lease property are on the tenant, not the landlord. As a result, the NNN lease is a good option for rental real estate investors who prefer a hands-off approach to commercial leasing.
If a window breaks, it’s not your problem. When the property tax comes due, it’s not your problem. What if a herd of elephants stampedes through the hallway? Again, it’s not your problem. (Unless they’re your elephants.)
The “whatevs” attitude NNN lease landlords take on makes this lease type a desirable option for investors who live far from their commercial real estate properties.
You’ll earn steady passive income
A triple net lease can give you a consistent stream of passive income. That’s because you’ll receive regular rent payments. And — icing on the cake — your responsibilities as a landlord will be minimal.
Once you and your tenant sign the lease, you just have to sit back and wait for the base rent payments to roll in. And those payments will be the same every month. You won’t have varying costs for repairs and maintenance taking a chunk out of your profits each month.
This means more money in your pocket every month — making it that much easier to run your real estate empire. In fact, triple net lease arrangements work best for investors who own multiple rental properties.
You’ll lock in a long-term lease
It’s typical for the lease term on a NNN property to last as long as ten or even twenty years. So you won’t be struggling to fill a vacancy nearly as often as you would with another lease type. This can save you time, money, and a hassle.
Your NNN lease is transferable
Triple net leases can transfer from one property owner to another. So if you decide to sell your interest in the property, you’re free to do so. This will come in handy if you ever decide to invest in a different type of real estate or another income-generating strategy altogether.
Triple Net Lease Cons for Landlords
You’ll have limited income potential
Since the landlord and the tenant agree on a fixed base rent amount, there’s a cap on how much income you can earn as the owner of a triple net lease investment. You won’t be able to increase the monthly rent payments for the term of the lease.
Although this is great news for tenants, it can put a damper on the landlord’s profit potential. For example, even if local property values skyrocket, you’ll have to wait until the end of the lease term to impose a rent increase. With a long-term NNN lease, that could be ten years or more.
You may have trouble tenants
Not all tenants may be good at keeping your building in perfect condition. Your tenants will be paying all of the costs associated with the property — and some of these costs might increase over time. As a result, cash-strapped tenants might turn a blind eye to upkeep.
There’s also the risk that your tenant might fall behind on real estate taxes or neglect to pay them altogether. That might be enough to drive them out of business.
Most NNN leases are ground leases. That means, once the lease term is over, the property again becomes the responsibility of the landlord. You’ll have to deal with whatever’s left after the tenant vacates.
You could decrease this risk by using a bonded lease, also known as an “absolute lease,” “true NNN lease,” or — my favorite — “hell or high water lease.” This type of triple net lease puts every bit of building responsibility on the tenant. Even if Godzilla were to stomp on it, the tenant would have to pay to rebuild.
You’ll have turnover risks
Once a tenant vacates a property, it’s up to the building owner to get the space ready for another potential tenant. If you have a triple net property, this will likely cost more than it would with another type of commercial lease.
Say your former tenant occupied the space for decades. Chances are, there’s some wear-and-tear on the property that you’ll need to fix before you can rent it out again.
And since the previous tenant likely customized the space to their own needs, you may have to do extensive remodeling to prepare it for a new tenant. For example, you may have to readjust the floor plan or change the doors and windows. All of these repair and remodeling costs can quickly add up.
You may have trouble finding tenants
You may find it hard to find tenants for your triple net lease investment. Because tenants take on practically all financial responsibilities, it may be difficult to find tenants willing to pay for the extra costs, even with the lower rent.
The best NNN lease tenants tend to be national or regional chains. So instead of renting your space out to “Ma’s Coffee Kitchen,” you might have to wait for Starbucks to come around.
Is a Triple Net Lease a Good Idea?
As with most major real estate decisions, the choice to use a triple net lease is ultimately up to you. If you want to shrug off responsibilities in exchange for a steady stream of passive income, it can be a great solution.
However, keep in mind that your profit margins might be limited. After all, with a NNN lease, tenants typically pay a lower base rent. And chances are that lower amount might be locked in for decades.
That income cap makes NNN leases a better idea for hands-off investors who own multiple commercial real estate properties. They’ll enjoy multiple monthly payments.
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Frequently Asked Questions
How does a triple net lease work?
With a triple net lease, the tenant agrees to pay the landlord for taxes, insurance, and maintenance in addition to the base rent. As a result, the landlord typically charges a reduced base rent.
Who pays taxes in a triple net lease?
With a NNN lease, the tenant — not the landlord — pays the property tax bill. Keep in mind this also means only the tenant will be able to write off operating expenses on their tax returns.
Who owns the building in a triple net lease?
Although the tenant is responsible for maintaining the property and covering all associated costs, ultimately, the landlord is the property owner.
The Bottom Line
When done the right way, NNN leases can fast-track your path to financial independence. This type of lease structure is uber-popular among commercial real estate investors. But before offering this kind of arrangement, it pays to be aware of the triple net lease pros and cons.
Triple net lease properties put more financial responsibility on tenants, requiring them to cover the property insurance, taxes, and maintenance costs. At the same time, as the landlord, you’ll enjoy a steady stream of hands-off income. What better way to rake in the cash?