Triple Net or Net Net Net (NNN) leases are a commercial real estate lease structure that pushes the responsibility of the additional rent expenses related to operating the property, such common area maintenance, property taxes, and building insurance, onto the tenant or lessee. 

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These additional expenses make up the three “nets” and are commonly paid to the landlord on a monthly basis alongside the base rent.

These types of leases are more commonly found in retail properties, but are becoming more and more common in office and industrial, as well. There are several different variations of net leases, each of which places a different level of responsibility for property expenses onto the tenant. 

 

WHY ARE THEY DIFFERENT?

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There are many reasons that the lease on a property may be single, double, or triple net.

Triple net leases are far more attractive for landlords, since they will have minimal responsibilities and can pass all of the expenses on to the tenant. 

That means that a tenant may negotiate out of a triple net lease down to a single or double net lease, though these types of net leases are more commonly found among unsophisticated landlords and tenants.

 

THE DIFFERENT TYPES OF NET LEASE

There are three primary types of net leases:

• Single Net

• Double Net

• Triple Net

• Absolute Net

In a single net lease, the tenant is responsible for paying their base rent along with the property taxes.

In a double net lease, the tenant is responsible for paying their base rent along with the property taxes and building insurance. 

In a triple net lease, the tenant is responsible for paying their base rent along with the property taxes, building insurance, and common area maintenance. 

Absolute net leases push all responsibilities, including structural building maintenance, onto the tenant, leaving the landlord with no responsibility other than cashing those checks.

There are many reasons that the lease on a property may be single, double, or triple net.

Triple net leases are far more attractive for landlords, since they will have minimal responsibilities and can pass all of the expenses on to the tenant.

 

TRIPLE NET LEASE PROS AND CONS

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Triple net lease investments have a number of pros that can make them attractive for a wide variety of investors, but they can also have a fair amount of cons. 

Here are the benefits of NNN investments:

• Low-risk investment: because they are often leased by tenants who have been in business for many years, often corporate-backed

• Regular income stream: since the tenants pay their rent and expenses each month

• Long-term tenancy: NNN tenants often sign leases for 5 years or longer

• Principal paydown: assuming you will use debt to purchase the property, the tenant will be paying down your mortgage with every monthly payment they make

• Asset appreciation: historically the values of real estate have been rising, so if you buy the real estate in year 1, by the time you exit it in year 5, for example, you can expect to have some appreciation in the value of the real estate

• Minimal landlord responsibilities: landlords typically aren’t expected to maintain or care for the property outside of the structural components. You won’t have to deal with tenants, toilets or trash, and it’s not your responsibility to call the handyman. 

• Lower chance for turnover: many tenants that lease these types of properties intend to stay for quite some time.  Tenants also have a lot of specialized equipment on premises, making it rather expensive to relocate, thus making their leases “sticky”.

• You can make money while you sleep: once you close on the acquisition, you become an equity stakeholder in that real estate venture and can start collecting monthly income payments. In other words, you have the potential to make money while you sleep. Primarily when investing in properties with existing tenants where there is existing cash-flow, your money is working for you 24/7. 

• And, as is the case with all commercial properties, tax benefits.  Unlike interest payments or stock dividends, which can be taxed at your highest income bracket, the pass-through potential benefit of real estate ownership allows your share of the depreciation expense to offset your income. The tax benefits can be very material if you or your spouse can qualify for what’s called Real Estate Professional Status.  

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HERE ARE THE DOWNSIDES OF A NNN INVESTMENT:

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• Investment returns are capped: there’s usually no room during the initial term to add value in some form or fashion, so your returns are pre-determined by the lease.

• Higher vacancy risk: these buildings can also be very tenant buildout or location specific, so if the initial tenant leaves, it could be difficult or expensive to re-lease.

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As you can tell, there are far more upsides to investing in NNN properties than there are cons. Those cons, however, do add a fair amount of risk to the investment. Since returns are capped, NNN investments can be unattractive for the active real estate investors that want to work on the investment in order to boost returns. For the more passive investor, NNN projects are ideal since they are essentially turnkey commercial real estate investments.

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HOW TO INVEST IN TRIPLE NET PROPERTIES

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Below are the most efficient we’ve found working with our clients that have invested in triple net investments throughout the country:

1. DETERMINE YOUR PREFERRED INVESTMENT RETURNS

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Triple net lease investments can and will come with a wide variety of returns based upon the tenant, location, term remaining on the lease, landlord responsibilities, year of construction, and so much more. 

So, two investments with the same exact tenant and guaranty could wildly varying cap rates because of that. 

As an investor, you’ll want to determine what kind of return makes the most sense for you and then stick to that criteria.  It is probably a good idea to also do your own market research to see where cap rates are landing.

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2. SET YOUR TENANT AND TERM CRITERIA

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Not all tenants or triple net leases are created equally.

Some NNN investment opportunities may be offered at a very attractive cap rate, but after digging into the project you realize the current lease only has a few years remaining.

Every tenant also has a different credit rating, depending on their financial stability, number of locations, type of business or industry, and more. 

A tenant with a single location in Wisconsin naturally comes with higher risk than a tenant that has hundreds of locations nationwide - that is, of course, if you’re getting a corporate guaranty.

Some leases are corporately guarantied, meaning the actual company is putting their balance sheet on the line, while other locations may be guarantied by a new franchisee, who may or may not have the funds to pay the rent if their location isn’t successful.

It’s important that you set your tenant and term criteria on the front end so you can narrow in on your search. 

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3. FIND THE RIGHT LENDING PARTNER

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While triple net investments can make attractive all-cash deals, you’d be wise to open up the lending conversations early on to see where your debt terms will arrive. 

Since it’s possible to find investments equally attractive in Indianapolis and Georgia, it is a good idea to have local banking relationships that you can leverage as they often offer more aggressive terms that bigger nationwide banks.  

Having those debt terms on the front end (or at least a 30,000 foot view) will aid in your underwriting of the projects so that you can move quickly when you see something that fits your criteria. 

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4. SUBMIT AN OFFER AND PERFORM THOROUGH DUE DILIGENCE

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Once you’ve decided on a property, have your broker or investment advisor draft up a letter of intent to purchase the property.  After your offer has been accepted, it’s time to perform your due diligence on the asset and the tenant. 

Since you probably won’t be physically onsite (unless, of course, you choose to fly out and see the property), you’ll want to find a good local inspector to review the property and prepare a report for your review. 

The next and probably most important piece to review is the existing lease.

In addition to reviewing the lease yourself, it is a “must” to also send it over to your attorneys for their interpretation of the document. There’s simply far too much on the line with this investment to not do that - you are purchasing that lease and the income if provides you, after all. 

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The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.