Triple Net Lease (NNN): Meaning and Investment
If you’re exploring commercial real estate investments, you’ve likely come across the term “NNN lease” or “triple net lease.” It’s a common lease structure in commercial spaces, but if you’re unfamiliar with it, understanding its setup is key to deciding if it’s the right investment for you. Here’s a quick breakdown to help guide your search.
What is the Definition of NNN Investing?
NNN or triple net lease is a type of real estate lease structure for commercial spaces where the tenant pays a variety of expenses. It’s easiest to define NNN by breaking it down into the parts: net, net, net. Each of the three N’s refers to an expense the tenant is responsible for in addition to the monthly rent:
- Annual Property Taxes
- Insurance Premiums
- Common Area Maintenance Upkeep Costs
This type of lease is built on the premise that the tenant agrees to take on more than just their monthly rent payments. In a triple net lease (NNN lease), the tenant takes on all three operating-related expenses (property taxes, insurance, and the common area costs); essentially, all of the ongoing expenses of the property.
This type of lease is desirable for investors because it reduces the need for their direct involvement in managing the day-to-day of a commercial property — no need to head out to the property, hire someone to make repairs. Investors in NNN properties also generally don’t have to worry about property taxes or insurance premiums for the spaces. When a commercial real estate investor is looking to be passively involved, a triple net lease is the way to go.
The Difference Between Single Net, Double Net & Triple Net Leases
The difference between single net, double net, triple net, and absolute net lease may seem obvious: there are more responsibilities on the tenant and less on the landlord with each increase in the number of “nets.” In reality, it’s a bit more nuanced. Each type of lease used in commercial real estate depends on the parties in the agreement, and the structure can vary greatly.
- Single Net Lease: the tenant pays for rent and property taxes. The investor, property owner, or landlord is responsible for the maintenance and repair costs, as well as the property insurance. This is the least common type of lease for commercial real estate investors.
- Double Net Lease: the tenant adds the insurance premium to their rent and tax responsibilities from the single net lease. The landlord still maintains responsibility for repairs or utilities. This is still time-consuming and may be costly for the owners.
- Triple Net Lease: the tenant takes on the responsibility of repairs and utilities. It’s an agreement that benefits both the landlord and the tenant, which we’ll look at a little more closely later. This is the most common lease type for retail properties and other commercial properties like medical offices.
- Absolute Net Lease: This lease type goes a step further, placing all financial responsibility, including structural upkeep, on the tenant. This makes absolute net leases riskier for tenants and the most passive option for investors.
- Absolute Ground Net Lease: This includes everything a tenant is responsible for in an absolute lease, but the tenant leases the land and then usually constructs and maintains the building. At the end of the lease, the building typically reverts to the landlord.
Understanding NNN Leases
NNN lease properties are a great option for investors looking for opportunities with consistent, equity-building returns – without the day-to-day responsibilities traditionally associated with owning properties. Triple net leases (NNN) shift these responsibilities to the tenant, freeing up investors for other projects and properties. Let’s take a closer look at NNN leases and what goes into them.
Aside from the financial responsibilities for tenant versus investor, NNN lease terms range anywhere from 10-25 years – meaning they are a consistent, long-term earner for investors. The tenant agrees to occupy the space for many years, protecting the landlord from the need to constantly be seeking out a new tenant or the risk of dealing with a vacant property.
While NNN leases have commonalities, each lease agreement is ultimately unique, so different terms may be set regarding the costs covered. Operational costs like maintenance and repairs, taxes, and insurance are usually fully paid by the tenant (and often absorbed as a business expense), but occasionally these costs may be shared with the property owner. These types of variations would be agreed upon up front and outlined explicitly in the lease terms. Learn more about how NNN financing can work for you.
What Makes a Good NNN Property?
How do you know if the property you are looking at investing in will make a good triple net lease investment? The right NNN lease investment can add value to your portfolio for many years to come. In order to find the right fit, you need to find the best property for an NNN lease; this might look different from other properties in your portfolio. There are a few key elements that you should keep in mind as you seek the right NNN investment opportunity to expand or diversify your portfolio:
- Geographic Location: The geographic location of the property makes a huge difference in its investment potential. Growing cities and areas with strong population and economic growth are often the ideal places to sustain NNN properties.
- Property Location: Aside from the geographic location, the actual location of the property is one of the most compelling factors of a real estate transaction. A NNN property should be easily accessible. For example, a corner with high visibility, favorable traffic patterns, and proximal businesses that bring more people to the area is positive when evaluating triple net investment value potential.
- Business Type: The long-term success of your investment relies on the success of the tenant, so the type of business it is can impact your investment. To ensure that you have a reliable tenant who will be consistently responsible for paying rent and keep up with the other expenses associated with a triple net lease, you should look for businesses that will be able to withstand economic changes, like medical facilities, retail properties, grocery or convenience stores, and pharmacies. This business type may be a well-known brand or chain of a large company, because the brand name alone will drive traffic and provide a sense of security for the investor. Specifically, brands like Walmart, CVS, or Family Dollar can make a great NNN tenant for their brand recognition and associated longevity.
Pros and Cons of NNN Leases
When considering an NNN investment, you should have a well-rounded view of all of the pros and cons associated with this type of real estate transaction. There are both pros and cons for the investor and the tenant; let’s take a closer look at the pros and cons for investors, so you can better understand how this type of lease can add to your portfolio.
Pros of NNN Leases for Investors
For an investor, a triple net property can minimize risks and provide a steady cash flow stream. The longer length of the lease reduces the risk that the property will sit empty every few years while you find a new tenant. You can also better plan for the income stream of the property over the extended lease term. Also, as previously discussed, passing off many of the operating expenses of the property to the tenant makes it less costly and less time-consuming than other properties.
Cons of NNN Leases for Investors
As with everything, there can be cons to entering into an NNN lease. For investors, the biggest con can be entering into this agreement with the wrong type of business. Because certain businesses are better suited to NNN leases, investors and property owners need to carefully vet potential tenants to ensure that their investment will be protected from businesses that may not be able to fulfill their end of the deal. The other thing investors need to keep in mind is that everyone needs to understand the terms of the lease and who is responsible for which expenses.
Pros and Cons of NNN Leases for Tenants
Just like for investors, there are pros and cons for the other side of the lease agreement. You can learn more about the pros and cons for tenants here, but the key points to know include:
- NNN lease arrangements give tenants more control over their space for changes and repairs as needed, without the need for landlord cooperation.
- This lease type gives tenants stability to plan for the future with a long-term lease.
- Tenants need to ensure they factor the insurance and/or tax payments into their overall business expense forecasting.
Your Partner for NNN Expertise
If you’re looking for a risk-mitigated commercial property investment while building equity in your investment portfolio without a huge time commitment, an NNN property might be the right fit. With triple net investments, you can diversify your portfolio while keeping your time and energy for other projects you are passionate about.
Whether it’s your first triple net lease investment or your twentieth, having the right partner to guide you through this process is essential. Here’s what to look for in your net lease advisor:
- Demonstrated Experience and Track Record of Closed NNN Deals: When an advisor has shown successful negotiation strategies, they can better negotiate different scenarios in triple-net investment deals. A good advisor has case studies of recent deals they closed. They should also be able to give insight into the market, knowledge of property value and investment potential, and details on the profitability of your potential net lease investments.
- Client-Focused: A good net lease advisor isn’t just in it for a quick sale. They respect you and are focused on your goals and successes. They should want to help you meet all of your investment criteria and choose the best properties for your portfolio. They can help you with tasks like property evaluations and site visits, recommendations on your portfolio, and strategic advice or consultations.
Ready to get started? The net lease experts at Sands Investment Group have led thousands of transactions for clients.
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