Features of Real Estate Triple Net Leases That Benefit Investors

​Commercial real estate (CRE) offers one of the most lucrative investment options. It comprises property for business, including office buildings, industrial properties such as warehouses and distribution centers, and retail spaces like restaurants and shopping malls. Offering and managing the property, however, requires a formal agreement, also known as the lease, between the tenant and landlord (in this case, the investor or appointed property manager).

The three common lease types are gross, double net (NN), and triple net (NNN), each differing in the level of responsibility and cost obligations for the two parties. Under a gross lease, the tenant pays a single, standard lease fee, while the property owner is responsible for maintenance, taxes, and insurance. The NN differs from the gross in that, other than the base lease rate, the tenant pays for the tax and insurance, while the owner is responsible for the rest. Lastly, for the NNN type, the tenant is responsible for all the secondary costs besides the lease rate. The NNN arrangement bears several distinct features that benefit the CRE owner as an investment option.

The primary feature of an NNN lease is the operational cost benefit. As highlighted, the tenant is responsible for the property's daily expenses, including property tax, insurance premiums, and routine and capital maintenance costs. Firstly, the tenant bears the property and land rates fees to the relevant local authorities, depending on the jurisdiction, such as the county treasurer, local and municipal finance departments, or the parish. The payment schedule also varies and can be yearly, half-yearly, or quarterly. In an NNN arrangement, the property owner does not have to worry about fluctuations in tax rates due to property re-evaluations or changing local policies.

Secondly, the tenant pays insurance premiums that cover fire, vandalism, and water damage. However, the owner may still pursue long-term insurance for the building. Repairs and maintenance often pose a headache for property owners, especially the inexperienced or those with large or numerous properties. Busy commercial spaces with high traffic and demand for amenities, such as shopping malls, require frequent attendance, with significant downtime and loss of revenue and tenancy in the event of frequent breakdowns; an NNN lease agreement requires tenants to perform repairs and routine maintenance in common areas, such as shared spaces, as well as in individual spaces. However, the owner remains responsible for capital expenditures, such as roof replacement and an overhaul of the heating and ventilation system.

Bills can erode an investor's confidence in CRE options, especially for first-timers. NNN provides a more straightforward income prediction because it involves fewer unexpected costs. The stable, predictable bottom line allows the investor to focus on other investments, as the CRE option in the portfolio practically runs itself.

An NNN lease is especially attractive to institutional investors, as most have diverse portfolios and other responsibilities. Thus, a hands-off investment can serve as a passive income source. However, success depends on a solid lease agreement from the outset, with clearly defined responsibilities and robust dispute-resolution mechanisms, as well as a tenancy clientele with goodwill and discipline.

Lastly, NNN arrangements attract lenders. At the end of the day, an investment financier seeks a solid, predictable cash flow to ensure on-time repayments. Commercial property under NNN leases thus offers low-risk options, greater securitization capacity, and better lending terms for investors. A significant percentage of tenants in an NNN-leased property are long-term renters, such as banks and health institutions, with tenancy periods ranging from 10 to 25 years. The reduced tenancy risk and low turnover also serve as valuable selling points for lenders.

Derek Copeland

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