What is a triple net lease and how does it work?
A triple net lease (also known as an NNN lease) is a rental agreement in which the tenant or lessee agrees to cover all expenses of the property, such as property taxes, building insurance and maintenance. These payments are in addition to rent and utility charges, and in the absence of a triple, double, or single net lease, the landlord is normally responsible for all payments.
Triple net leases: an overview
If an owner uses a triple net lease to rent a building to a business, the tenant is responsible for paying the property taxes of the building, insurance and any maintenance or repair that the installation may require during the term of the lease.
Rent charged under a triple net lease is often less expensive than rent charged under a regular lease contract, as the tenant absorbs these costs that would otherwise be borne by the landlord. The solvency of the tenant determines the capitalization rate which is used to calculate the amount of the lease.
Investors who want to add a stable cash flow to their portfolio through monthly rent payments from tenants prefer triple net leasehold real estate. A fundamental benefit of a triple net lease is that the tenant often bears the majority of the costs of operating the property, making it a low risk, low impact investment for a landlord with constant monthly income.
However, since each triple net rental agreement is tailored to the specific property, there may be stipulations setting out specific terms and financial obligations for both landlord and tenant. If you are buying a home that already has a triple net rental agreement in place, it is essential that you understand all of the major terms of the long term agreement (and will become yours when purchasing the property).
Understanding all the intricacies of a triple net rental agreement will ensure that you know exactly what you are responsible for as a landlord and prevent unforeseen charges from affecting the profitability of your NNN real estate investment.
What to look for
here is five of the most important things to look for in a triple net rental agreement.
1. Monthly rent contract
As a landlord, you rely on triple net tenant monthly rent payments to supplement your income, so understanding how much is agreed upon in the deal and if it will change over time is critical.
Many triple net leases include fixed monthly rent payments for the duration of the lease, so you’ll know exactly how much you’ll earn each month (and can include in how much profit you’ll make after paying off the mortgage on the property. ). However, in some circumstances (although very rare) rent increases are built into the rental agreement and will occur regularly during the term of the lease to reflect the growing value of the property or planned expansion in the area. .
2. Tax responsibilities
Tax duties are also defined in a triple net rental contract. Property taxes are often passed on to the tenant to pay annually, but since every agreement is different, it is essential to ensure that you fully understand the tax requirements of the property so that you are not liable for any payments. taxes or fines taken into account.
3. Insurance premiums and claims
In a triple net rental agreement, the tenant is generally responsible for the insurance premiums. On this particular factor, however, there is a greater degree of variation between transactions. Some leases, for example, may provide that the tenant is responsible for obtaining and maintaining the applicable NNN insurance policies on the premises.
Others, on the other hand, may include clauses that delimit the many types of insurance policies and who is responsible for each. Make sure you understand your insurance obligations in a triple net rental agreement so you can determine what is costing you, if any. you will incur for the policies that you must purchase as the owner.
4. Service, repairs and maintenance
Ongoing maintenance costs are another part of a triple net rental agreement which can vary depending on what is discussed. While most of the major operating expenses are covered by net tenants, each agreement will specify how certain maintenance costs are allocated between landlord and tenant. For example, the tenant may be responsible for general upkeep, repairs and maintenance, but the landlord may be responsible for some or all of the costs associated with major repairs from the triple net lease to the structure, such as the roof and framing.
5. Utilities and janitorial fees
In a triple net agreement, tenants normally bear all the costs of utilities and cleaning services, although there are times when these charges are negotiated as a cost shared between the tenant and the landlord. Any monthly expenses you agree to pay on a property will be deducted from your profits, so find out if a triple net rental agreement includes these fees up front so you can incorporate them into your decision.
Why sign a triple net lease?
Tenants pay less rent when they sign a triple net lease than when they sign a gross lease. When it comes to a gross lease, landlords often include the cost of repairs and maintenance costs in the rent, and they are very likely to add a margin of safety in their estimates. If no building maintenance is required for the duration of the lease, the money stays in the landlord’s pocket.
While this may sound alluring, keep in mind that this is a two-edged sword. With a triple net lease, tenants take on additional risks as they are responsible for any repairs that may be required during the term of the lease. It also means that if the building is in good repair and requires little maintenance, tenants can save money. However, tenants who rent a structure that requires major repairs may find NNN leases more expensive than gross leases.
Interesting Related Articles: “What Are Owners?” “