Triple net lease properties (NNN), also sometimes referred to as single-tenant, are a safe and attractive investment that never seems to wane in commercial real estate popularity. Offering relatively low risk with a steady monthly income stream, this investment type can include office buildings, retail malls, industrial parks or freestanding buildings.
Below we break down the triple net lease property, defining it and outlining the risks and benefits of this popular investment type.
A triple net lease (NNN) is a lease agreement on a commercial property where the leasee (tenant) enters into a long-term agreement (typically anywhere from 10 to 20+ years) and is solely responsible for all expenses and costs related to the property (in addition to the rent).
In the NNN agreement the leasee pays the “net” amount for three costs:
- N: Net of operating costs (repairs, common area maintenance, utilities, etc.)
- N: Net of building insurance
- N: Net of property taxes
Because the leasee covers all property costs, which in other commercial property types would typically be the responsibly of the owner/landlord, rental rates are generally lower than in standard lease agreements.
Boiled down the benefit to triple net lease properties is this: Steady income that you don’t really have to work for. Triple net lease properties are popular with investors because they are low-risk and provide a steady monthly revenue stream. To top it off they require little to no management. No vacant units to rent, no property managers to stay on top of, no property expenses to pay, no angry or unhappy tenant to contend with.
The only thing that an owner of a triple net lease property has to handle is accounting related responsibilities: bookkeeping, tax returns and when it’s time to refinance, deciding 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 without having to pay taxes, this is done through a 1031 exchange. Learn more on that topic here.)
This makes triple net lease properties highly popular with absentee and starter owners who want to enter the real estate game without any of the work, hassle or risk.
Although triple net lease properties are low risk, they aren’t risk free. It’s easy to get carried away with the many advantages, but there are still a few items to take into consideration before investing.
The first item to consider is 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 triple net lease properties you have one tenant occupying your property for a very long term, financially taking 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 a worthwhile cause that will save you in the long run.
Triple net lease 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. From repairs, to leasing fees, to lost income sitting on market, many investors choose to sell their triple net lease properties at the end of a long-term lease in order to shift this risk to a new owner.
As the Baton Rouge market continues to grow and expand 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.