Triple net lease properties (NNN) are also sometimes referred to as single-tenant or a triple N. They are a safe and attractive investment that never seems to decrease in commercial real estate popularity. These properties offer low risk with a steady monthly income stream. This investment type can include office buildings, malls, industrial parks or freestanding buildings.
Below, we break down triple net lease properties. We will define them and outline the risks and benefits of this popular investment type.
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What is a Triple Net Lease?
A triple net lease (NNN) is a lease agreement on a commercial property where the tenant enters into a long-term agreement. This is typically anywhere from 10 to 20+ years. Besides the rent, the tenant is also responsible for all expenses and costs related to the property.
In the NNN agreement the leasee pays the “net” amount for three costs:
The leasee covers all property costs. Because of this, rental rates are generally lower than in standard lease agreements. In other commercial property types, these costs would most of the time be the responsibly of the owner or landlord.
Benefits of a NNN Lease
Boiled down, the benefit to NNN properties is this: Steady income that you don’t have to work hard for. Typically, these properties are newer properties, have a good variety, and are easy to maintain. With the low-risk and stable income, these properties tend to be very popular among investors. They also provide a steady monthly revenue stream. To top it off, they need little to no management.
Some other benefits are: no vacant units to rent, property managers to stay on top of, property expenses to pay and no angry tenant to contend with.
The only thing that an owner of this kind of property has to handle is accounting related responsibilities. Accounting responsibilities include bookkeeping, and tax returns. And when it’s time to refinance, accountants will decide whether to exchange the property or not. (When a triple net lease property is sold, the owner can choose to roll that capital into another triple net lease property. Owners can do this without having to pay taxes, this is done through a 1031 exchange. Learn more on that topic here.)
This makes NNN properties very popular with absentee and starter owners. It’s popular with them because they want to enter the real estate game without any of the work, hassle or risk.
Risks of a NNN Lease
Although these NNN properties are low risk, they aren’t risk free. It’s easy to get carried away with the many advantages; however, these investments require more understanding of the process than more typical real estate ventures. Although, there are still a few items to take into consideration before investing.
First, an investor should consider the risk of the tenant, i.e. their credit worthiness. There’s an old saying in commercial real estate: A lease is only as strong as the tenant behind it. In these properties, you have one tenant occupying your property for a very long term. They financially take care of everything…so it is critical that you ensure they are capable. Taking the time to perform credit analysis and checking financial statements is worthwhile. Also, it may be helpful to decide on a set of criteria for the tenant to answer. These criteria could include number of stores/rentals, management stability, and how their industry sector is looking. This may seem excessive in some ways, but it is better to be safe than sorry when choosing a tenant to rent your investment.It will save you in the long run.
Furthermore, NNN agreements still must abide by typical real estate due diligence, no matter what the tenant’s credit rating is. This would include the leasing terms, property quality and use, and the condition of the local economy. This establishes the current value of the property and sets an outlook for future investments and tenants.
A disadvantage to the tenant is, it is his responsibility to pay property taxes. Many communities raise appraisals on commercial property yearly, or they raise the tax rate per $1,000 of value, resulting in a larger tax bill for the tenant.
Lastly, NNN properties only have two occupancy rates: 100% or 0%. So, the other risk for this investment comes at the end of a lease-term. Re-leasing can be a financial and time burden if a tenant chooses not to renew. Many investors choose to sell their triple net lease properties at the end of a long-term lease for some reasons. From the repairs, to leasing fees, to lost income sitting on market. Selling the property, shifts this risk to a new owner.
Searching for Triple Net Lease Properties?
As the Baton Rouge market continues to grow we see triple net lease properties pop-up everyday in our area. If you are seeking to either invest in, or lease, this attractive asset type reach out to one of our NNN experts who can help guide you through the process.
About Us – The team at SVN | Graham, Langlois & Legendre has over 99-years of combined experience helping clients across the Baton Rouge market get the most value out of their CRE investment. Contact one of our dedicated CRE professionals today with any questions you may have and start seeing the returns in a market that will make sure to give today, tomorrow and for the extended future. To reach us, you can call us at 225.367.1515 or you can send us a message on our website. You can also follow us on Twitter at @svngll or on Facebook.