Physical factors investors use to evaluate commercial properties as potential acquisition targets are location and condition. However, it’s important they also analyze the unseen. One unseen factor is the lease types for tenants.
Understand the structure, expiration dates, monthly payments, and types of each lease. These play a critical role when creating your financial projection for commercial property and estimating the returns. As you investigate triple net or NNN properties for sale, you will come across two major commercial property leases.
Two Types of Commercial Property Leases
When the landlord and tenant agree, a decision for the lease on the commercial property needs to be made. There are two major real estate leases you can enter. Regardless of the agreement you have, you must read the details for you to know what is expected.
This lease agreement requires the tenant to make one lump payment. The landlord handles maintenance, janitorial services, utilities, and insurance.
Sometimes, the tenant has to pay for gas, water, or electricity. Since more is required from the landlord, the payment sum is usually high to compensate. Gross leases make it easy for tenants to make payments, so they focus on growing their business. The gross lease rates are likely to arise when utility and maintenance expenses rise.
The base rent is usually lower in a net lease. However, the tenant makes payments on maintenance tasks.
The fees that tenant pays depends on the type of net lease they have with a landlord, these are:
- Single net lease – N leases require the tenant to pay base rent and a portion of the property tax while the landlord covers maintenance and utility costs.
- Double net lease – NN leases require tenants to pay the base rent, portion of the property tax, and janitorial and utility expenses. The landlord is responsible for repairs and maintenance.
- Triple net lease – NNN leases have tenants responsible for all repairs, utilities, property tax, maintenance, and rent. While the total amount paid might be the same as in a gross lease, the tenants are more responsible for keeping track of when and where each payment is going.
Given the uniqueness of triple net properties for sale, it is important to dive into their leasing structure.
Understanding the Triple Net Lease Structure
This lease type is usually appropriate for businesses such as restaurants, retail stores, and offices. The lease usually lasts for close to ten years. However, tenants may prefer to rent the property for as long as 25 years.
While the tenant is paying for insurance, taxes, and maintenance, the property is still in the landlord’s name. Plus, the income from the property is still liable for tax.
How a Triple Net Lease Works
It might sound confusing at first, but it is not. The lease structure is popular with investors in commercial real estate all over the country.
Like normal leases, tenants agree to pay monthly rent for NNN properties mainly based on the property value. The rent might be fixed for the entire lease time or involved a fixed increase each year to account for inflation.
Apart from gross rent, the tenant also pays for property insurance, property tax, and other general or specific expenses related to the property. This means the owner does not have to worry about such affairs. You can negotiate these terms with the help of a broker.
NNN Property Variations
There are two variations of lease agreements that govern most NNN properties for sale.
True Triple N Lease
Absolute NNN or true triple net lease is a binding arrangement. This means the tenant handles every expense on the property. The tenant is responsible for any repairs or rebuilding, even if insurance will cover the damage.
This involves the landlord and a tenant putting up structures on the property. At the end of the agreement, the constructed structure becomes the landlord’s property.
The Benefits of NNN Leases
The lease agreement involves two parties, so it is critical to understand the potential benefits NNN leases offer both the owner and tenant.
Benefits for the Landlord
- A consistent income—The biggest benefit of buying NNN properties for sale in Florida is long-term occupancy. This ensures you have a consistent income for several years. You can use this steady income to grow your capital.
- Fewer responsibilities—Landlords are free from responsibilities such as maintaining the property, property taxes, and managerial tasks.
- Landlords can sell the property with the lease—Owners are at liberty to sell their property even when there is a NNN tenant on it. This allows the freedom to earn a return on the investment. The lease transfers to the new owner with the same terms. However, buyers of NNN properties for sale in Virginia have to abide by the terms agreed on by the previous owner.
- Income from rent is separate from actual rent—Monthly gross rent from the tenant is separate from other property expenditures the tenant is responsible for. While for the tenant all expenses related to a property are one, it is just rent for the landlord. This makes it easy to maintain your account books since all other payments, including maintenance costs and taxes, are handled by the tenant.
The Benefits for the Tenant
- More control over the property—The tenant handles repair and maintenance costs, which gives them more control in terms of the repairs they choose to complete and the contractors they hire. Tenants can carry out critical property improvements to allow for business and revenue growth. Further, you have more control over your utility expenses since you are managing the utilities and only pay the actual costs.
- Reduced rent—The tenant is paying reduced gross rent.
- Location—NNN leases are common for properties in areas that experience higher exposure and traffic. This allows businesses to generate high revenues and experience very high growth rates.
Conclusion: Is NNN net Lease a Good Idea?
NNN net lease is most beneficial for the tenant because of the property location, which can break or make the success of a business. If you are looking for NNN properties for sale to increase your passive income, make sure to look in the high-traffic areas. However, make sure that you negotiate the right terms with potential tenants or ensure the current rental lease is agreeable before signing on the dotted line!
Want to find out more? Check out our blog for more ideas on how to improve your investment portfolio with real estate.