A triple net lease agreement (NNN) is used in commercial real estate. This will be a written agreement that parties must complete before a lease is official. This agreement will be between two parties – a landlord and a tenant. This type of agreement will detail the responsibilities of each party as it relates to the commercial rental property as well as list the time for the lease term. This will ensure that both parties are aware of their responsibilities before the lease is official.
In a triple net lease agreement, single tenants are typically responsible for most of the costs related to the property. They may need to contribute to the costs for expenses such as real estate taxes, repair and maintenance, and upgrades. They will also be responsible for the monthly rent and their own operating expenses. Specific amounts or contribution percentages should be included in this agreement so that the tenant can budget accordingly.
A single net lease is often referred to as a Net lease or an “N.” With this sort of lease, the tenant pays the property tax for the leased property. N leases aren’t commonly used.
A double net lease is often referred to as either a Net-Net or “NN.” With this lease, the tenant is responsible for paying both the property tax and the building and property insurance for the leased property. The landlord takes care of expenses related to the need for structural repairs and common area maintenance expenses.
The tenant pays the real estate taxes, building insurance, and maintenance on the leased property. They also pay normal expenses that occur with most leased properties (such as utilities and, of course, rent; rent may also be referred to as a lease rate). The tenant is also responsible for maintenance costs. This is the most common sort of lease when a commercial building is freestanding.
A bondable lease is also known as an absolute triple net lease, true triple net lease, hell-or-high water lease, or an absolute net lease. The tenant not only pays everything mentioned in the NNN lease, but also takes on all other risks associated with the property. For example, if the building burned down, they would be the party responsible for rebuilding it even if the insurance proceeds didn’t cover the full cost. They’d still be required to pay rent, too. In short, no matter what happens to the property in terms of risk, the rent must still be paid.
A ground lease is another form of net lease. Land is leased to the tenant by the property owner. The tenant is allowed to build a building on it while making lease payments. The tenant is given a leasehold interest in the property. Usually, the tenant pays the same expenses as with an NNN lease or bondable lease. However, when the lease ends, the ownership of the building is given to the person who owns the land.
With a gross lease, the landlord pays the property taxes, insurance, and building maintenance. However, the cost of rent is generally higher than a net-net-net lease because the landlord uses the rent to cover those costs. The tenant may or may not pay all of the utilities associated with the property. Percentage leases are often used in retail environments, such as a shopping center. The amount of the rent could be based on a percentage of gross sales, it could be monthly rent plus a percentage of gross sales, the greater of a fixed amount of rent or a certain percentage of sales, or it could be a minimal rent with a certain amount of sales.
Because a triple net has very specific responsibilities, it’s important to understand the risks and benefits for those who may be party to the lease or who are at least interested in exploring its use.
Many investors have begun using lease investments because they are low risk. They create a reliable income and take away a lot of the risk associated with owning property. Property portfolios often have triple net leased properties listed. Those buildings generally include office buildings with office space, retail shopping areas, and restaurants. These leases last around 10 to 15 years and include an increase in rent.
Not all investors qualify to use these leases. To use this as an investment, the investor must have a net worth of at least $1 million, but that cannot include the valuation of their primary home. They must have at least $200,000 of income if they are single and $300,000 in income if they’re married. Someone without the substantial assets required may be able qualify if they invest in a real estate investment fund.
Landlords of commercial properties like these commercial lease agreements because they remove a lot of the risks associated with owning and operating the property. Taxes and insurance can get expensive. The triple net passes those expenses on to the new tenant, they gain income that often doesn’t have to be put back into the property (with some exceptions).
Since the lease is usually signed for 10 to 15 years, the landlord gets the benefit of not needing to market the property again. They also know how much rent they’ll get. They may also work in rent increases into the lease.
However, if the building has common areas, the landlord may be responsible for repairs and maintenance for those areas.
The tenant assumes most of the risk related to the property when they enter into this sort of lease. They assume the expense not just for leasing the property (the rent payment), but also the building insurance, taxes, and maintenance. Before a tenant signs this sort of lease, they should thoroughly review it to make sure that they understand their obligations, whether there’s a rent increase, and that they understand the length of the lease. The tenant should also make sure that they understand who is responsible for the maintenance or repair of any common area.
One of the major differences between a triple net and what you may think of in terms of a lease is that with the triple net, the expenses associated with the property is passed on to the tenant although they’ll never gain any sort of ownership rights.
Building maintenance is an expense usually picked up by the tenant. If the building is well cared for and in good condition, those expenses may be minimal. However, heat and air units get old. They stop working. Plumbing problems can happen even if a building seemed to be in great condition. So, tenants should keep in mind that they’ll be responsible for those surprise expenses for those sorts of issues. If the building needs a new roof or even just roof repair, that is a cost that the tenant will pay. Maintenance is an unpredictable expense.
With a triple net, tenants are obligated to carry insurance on the property. They’ll also have to pay deductibles if a claim is filed with the insurance company. If a tenant allows the insurance policy to lapse for any reason and damage of some sort happens to the property, the tenant will be required to pay for that damage out of pocket.
The tenant is also responsible for paying property taxes. Depending on the appraisal, this can get very expensive. Before you enter into a lease of this nature, make sure that you do some research on the property through the tax assessor’s office and find out what sort of tax bill you’ll be responsible for paying.
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