If you're a landlord, you've probably heard of a triple net lease. However, you may be wondering whether or not that type of lease structure may be right for one of your investments. To that end, we've listed out some of the biggest triple net lease pros and cons below. Read them over to get a sense of whether this type of lease might be right for you.
Pros of a triple net lease for a landlord
Truthfully, there are many benefits to choosing a triple net lease structure as the building owner. We've laid out the most important ones below for your consideration. Take a moment to look them over to get a better idea of what to expect from this sort of arrangement.
There are different formats that can be utilized
Believe it or not, a triple net lease can be a bonded lease. This form of the lease is an "absolute lease" or "true NNN lease." With an absolute lease, every bit of monetary responsibility for the property falls on the tenant. In most cases, the tenant would even be held responsible for reconstructing the building in the event that there was a casualty like a hurricane or an earthquake, no matter what money their insurance company would provide.
That said, absolute NNN leases are rare, except in particularly prime locations. It's much more common to see an NNN property under something known as a "ground lease." With a ground lease, the tenant is given a leasehold interest in the property, meaning they're allowed to alter the land in any way they see fit during the lease term. However, after the lease term is over, any buildings they've constructed on the land usually become the landlord's property.
These leases are long term
Similar to any commercial real estate lease, triple net leases are longer than residential leases. However, where the average commercial real estate lease ranges from three to five years, NNN leases can last up to 25 years or more. In some cases, it's possible to see ground leases that last for up to 99 years in total.
Traditionally, having a longer lease term benefits the landlord because there's less turnover to have to worry about and there is also less opportunity for vacancy.
They provide consistent income
Usually, these leases are structured with either flat rent or with a fixed increase in the lease payment to account for inflation. In fact, it's not unusual to see a 3% rent increase structured into the triple net lease agreement, which means the property owner can generally expect to see a little bit of profit growth, even if the lease term is particularly long.
The landlord has minimal responsibility
Since most of the costs of keeping the property up and running are passed through to the tenant with a NNN lease, the landlord's level of responsibility in this scenario is usually very minimal. In most cases, the tenants are responsible for paying the cost of taxes and property insurance plus any construction costs or capital expenses needed to make the land usable for them and any particular operating expense needed to keep the building(s) up and running.
These leases are transferable
Lastly, the leases on triple net lease property are typically transferrable, meaning you can sell your interest in the property, even if a lease is in place and the property is occupied. This is a huge plus for you, as the property owner, because that means that you'll have the ability to move on with your investment strategy when it makes the most sense for you, and you won't have to worry about structuring a sale around when the lease will be coming to an end.
Cons of a triple net lease for a landlord
While there are many benefits to a triple net lease, there are a few downsides to consider as well. Take a moment to read these over and to take them into consideration as you decide whether or not a triple net lease is right for you.
There are earning caps
Since you'll pass on many of the costs of owning and operating the building to the tenant, rents on NNN leases are typically lower than what you might expect for a single net lease or double net lease. To that end, there is a cap on how much you can expect to earn. In addition, though these rentals will likely provide you with a source of consistent income for many years, be aware that -- even if you negotiate a fixed increase for inflation -- the rate you're getting may not match market rates.
It can be harder to find a tenant
As you might expect, it may be harder to find a tenant for this type of lease, especially if you're offering an absolute lease. Often, tenants don't want to take on the level of financial responsibility associated with one of these leases, so expect the process of finding someone to take over at the end of your existing lease to be a bit of a challenge.
These leases often come with high rollover costs
Everyone knows that changing over a lease comes with rollover costs. However, with this type of lease, you can expect them to be higher than they would be for a residential lease or even a shorter-term commercial lease. Put simply, if you have a tenant in place for 25-99 years and they don't pay attention to upkeep, there's going to be a lot of wear and tear. When the lease ends, you're going to need to be prepared to put a sizable chunk of money into restoring the space to move-in ready condition.
Is a triple net lease right for you?
In the end, the decision of whether a triple net lease is right for you is a personal one. If you're willing to wait for the right tenant in order to have an investment that provides you with consistent income while also adding a minimal amount of responsibility to your plate, then an NNN lease may be the right choice for you. If, on the other hand, you're willing to take on more responsibility in exchange for a bigger profit margin, it may be worth looking into other options.
In the end, there's no singular right answer. Above all, what matters is that you choose the lease structure that makes the most sense for you.