You’ve dabbled into some real estate recently and learned all you can about their jargon, specific terms, and even their investment schemes. With that said, you might have heard of one lease scheme (read more) popular with those having commercial structures, not for residential use—the Triple Net Lease. Structure plays a great role in this scheme, and as a player in the real estate field, it’s imperative to learn all about them.
For residential buildings, a residential lease is often considered. However, the Triple Net Lease (or NNN for short) is not applicable for this type of property use. Instead, NNN focuses more on commercial use, especially on single-tenant buildings. It’s an excellent choice for landlords and investors, but can a tenant also benefit from it? We’ll be covering that and more in this article meant for both tenant and landlord.
2 Types Of Real Estate Leases
There are two main types of real estate leases you can learn about: Gross and net leases. The only difference between these two is the types of expenses the tenants are expected to pay for.
- Gross Lease
When the tenant and landlord agree upon a fixed rate for the rented area, this is called a Gross lease. Some differences can also occur from contract to contract, as a certain number of landlords will let the tenant pay utilities such as electricity and water bills. It still depends on what terms both parties have agreed upon.
This type becomes one of the most commonly known for apartments. It’s the usual arrangement seen in the U.S when it comes to residential buildings. Other forms of use can also utilize gross leases, such as hotels, motels, inns, and storage units.
- Net Lease
Net lease focuses more on the tenant than the landlord or owner when it comes to financial obligations. The tenant can be responsible for paying taxes, utilities, insurance, etc. This category is where the triple net leases falls into. However, before going forward with this type, there are two other choices for both parties to choose from and one ultimatum.
There are four sub-categories for a Net Lease. They are:
- Single – This type requires the tenant to pay for the property taxes. This is already on top of rent and utilities (if both parties have agreed to it).
- Double – On the other hand, a double net lease requires the tenant to pay both property taxes and property insurance. This is also on top of rent and utilities.
- Triple – This is the Triple Net Lease (NNN). This scheme requires the tenant to pay all fees regarding the property, namely taxes, insurance, and maintenance/petty fees. This is, like the aforementioned items, on top of rent and utilities.
- Absolute – As the name suggests, it covers all existing payments, including major repairs. If there are structural damages that can be considered major during a triple net lease, this might still be the landlord’s responsibility. However, for this item, the tenant is required to shoulder it as well.
Out of the three, the most commonly used is the Triple Net Lease. Sometimes, because of its popularity, it is used interchangeably with the very category it falls into. The first and last types are rarely chosen, while the second one still ranks second under the commonly used leases.
As for where the payment goes, some landlords prefer the money to go through them. This is to ensure the tenant is indeed paying for their dues and on time. The expenses included in this type is also why many of these contracts become long-term, extending to a minimum of 10 years.
Benefits Of NNN (Landlord)
- Responsibilities Are Waived
These responsibilities mean the three nets in the lease, namely property taxes, insurance, and maintenance. Because each tenant is responsible for their own share to pay, it leaves the landlord little to no responsibility for the property. This also unburdens the landlord in maintenance work for the structure, as the rentee is also paying and managing for it.
- Protection Against Inflation
Inflation means a sudden sharp increase, which can happen when one is paying for property fees. For example, if the property insurance suddenly spikes, the landlord is in no way affected by the sudden rise, as the tenant holds that responsibility.
- Stable Income
Because the landlords or investors no longer hold the key to paying the expenses, their incomes become much more stable due to the fixed price of rent. In fact, some NNN contracts include a rent increase which adds to their profit over time.
- Credible Tenants
One of the risks landlords and investors face in having residential properties leased is the credibility of the rentee. Tenant credit (link: https://www.millionacres.com/real-estate-investing/rental-properties/how-run-tenant-credit-check-and-why-you-need/) is so important because it ensures your tenant is low-risk and credible and wouldn’t run away without paying their dues. What’s great about NNN is that all creditors availing this are credible and are usually big companies.
Benefits Of NNN (Tenants)
- Absolute Control
Having all the responsibility means the tenants have control of the properties daily and monthly operations. They have a say in what state their property should be maintained without the landlord’s supervision. This is an excellent choice for tenants (companies) that want to uphold their brand reputation.
- Lower Rent Fee
Because they already shoulder most of the expenses, the base rent for these leases turns out to be lower than usual. This can also be due to the long-term contract both the renter and landlord have agreed upon (some lasting for longer than 25 years).
Significant Risks
(Landlord)
Vacancy
Above all feasible risks a landlord may have with NNN, vacancy becomes the most problematic. The worst part is it cannot be remedied, as a triple net lease is for single-tenant use. Therefore, if you opt for this type of lease, your property will either be occupied or not occupied. And if it is the latter, then a significant loss will find you.
(Tenant)
Exorbitant Expenses
The first and only risk for a tenant in a triple net lease contract is a sudden sharp increase of property fees or the three nets. This could be due to extreme inflation or if an accident occurs where insurance cannot cover the damages. It is then up to the tenant to repair the property while still fulfilling their obligation in paying fees.
