A triple net (NNN) is termed as a form of lease, where the tenant is responsible to pay all operating expenses related to a property. The triple net or NNN lease is regarded as an investment, where the landlord is not liable for operating expenses. It is a form of lease commonly used in Commercial Real Estate business. Despite all its popularity, this lease is misunderstood by most of the Commercial Real Estate experts. If you are willing to invest in this business NNN Tenants will make you understand the concept of triple net lease, or click here to read.
This type of lease includes both the net lease and the gross lease. There is a hybrid lease that usually falls in the middle of these two. When we talk about a triple net lease or the NNN lease, we mean an absolute net lease. And if a lease is a NNN lease, it doesn’t mean that it is an absolute net lease. There are some points to consider for convenience. The only way to understand a lease is to read the terms and conditions properly. Many times a simple lease like the triple net lease can have some conflicts with the terms of the lease, say full- service, or modified gross that are commonly used by the landlords and the brokers.
What is not included in NNN lease?
There is a misconception that a true absolute net lease covers all property expenses. From the landlord or the tenant’s perspective, an absolute NNN lease can be taken as a turnkey with a strong tenant. There are some expresses that are not covered by the tenants for eg. accounting cost/legal cost (while drafting and reviewing documents). These costs or expenses are related to the purchase cost of the property, hence, these are not covered in a standard NNN lease.
Triple Net Lease a Risk Investment:-
Another misconception with NNN lease is that they are not risky. There are many advantages of triple net lease but it also has some risk factors. The initial advantages of “triple net lease” are that they provide predictable revenue scheme because of some pass-through and long term lease in place, and due to low management requirement you get a hassle free investment.
With these advantages, the triple net lease has some risk involved.
- Because this investment is for single tenant properties, the tenant credit risk should be properly understood.
- Many people doubt the strength of the triple net or NNN investment because the lease is guaranteed by the parent company which is publicly traded and financially strong.
- There is a possibility of a tenant to become bankrupt as he may fall over the terms of the lease. This should be notified that single tenant net properties are either 0% or 100% vacant.
- Another risk to consider is the risk of re-leasing. It has been observed that the risk of re-leasing is shifted to the new owner because most of the triple net investment properties are sold towards the end of a long term lease. This could be full of risk for the new owner if he doesn’t have a skillset or a strong team to look after.
In Commercial Real Estate the NNN lease of a triple net lease is the best lease structure. After discussing the overall impact of commercial real estate, triple net lease, the misconceptions about them, major risks associated with NNN investment, properties, we come to a conclusion the NNN tenant or the triple net lease is the best lease to invest in commercial real estate.