5 Advantages of Triple Net Leases
As the owner of property for lease or rental, there are advantages of offering a triple net lease (NNN) to prospective tenants. The actual rental dollars received from a triple net lease arrangement might be lower than the market average, but the advantages in terms of cash outlay for expenses such as taxes, utilities and maintenance can constitute great value over the long term.
So as a lessor, is a triple net lease option worth considering?
If you own older warehouse property, or are looking at a building that requires updating, here are 5 reasons to consider a triple net lease arrangement, and some important ways to make it work for you.
1. A Lower-Than-Market Lease Rate
A lease under market average might be just the ticket for a tenant willing to sign a lease of 5-10 years or longer. In exchange for lower rent, the lessee commits to make necessary interior improvements or to tailor the interior space for their own specialized use.
The triple net arrangement works well for warehousing operations, distribution companies and large commercial tenants who are concerned more about space than specific amenities. An owner is freed from the responsibility to make interior changes or to complete specific updates.
2. Shift of Responsibilities
Payment of property taxes, certain municipal assessments, insurance, utilities and routine maintenance are shifted from landlord responsibility to the tenant. Depending on the specific terms of the lease, major repairs may also be the tenant's responsibility. Specific language of triple net leases can differ substantially, however, and it is not uncommon for an owner to be held liable for certain major repairs, including roofing, plumbing, HVAC and even parking lot paving.
Built-in escalator clauses are common, but over the term of a long-term lease, rental rate increases might not keep up with inflation. A triple net lease is sometimes considered a "fixed-income investment". While it provides constant cash flow, it is not necessarily the best way to build an income stream that allows for additional investment. With a triple net lease, the goal is often to secure a long-term client at a rate that covers a mortgage note, relying on appreciation to build equity.
4. Simplified Management
Absentee landlords may benefit from triple net leases, as management duties are low. In addition, tenants are commonly single entities, relieving an owner of the necessity to deal with multiple tenants and varied lease terms and vacancies. Simplified management is a definite advantage for those who need to spend a large portion of their time tending to their other investments.
It should be noted, especially in an uncertain economy, that losing a single tenant results in a building that is 100 percent empty. The credit-worthiness of a prospective tenant, whether a national firm or a local lessee, should be a primary concern.
5. Tax Benefits
Certain tax benefits may accrue to owners, even though the expenses that constitute tax deductions are largely non-existent - as they are the tenants responsibilty. Depreciation schedules under U.S. tax regulations are also less favorable for commercial properties than for apartment buildings. As always, the best advice is to consult with a trusted tax adviser before buying a property with an existing triple net lease tenant, or considering such a lease for an existing investment.
The triple net lease route can be a win-win for both tenants and owners. Market strength, location, potential risk, overall management considerations, and stable, long-term income are just some of the factors to analyze. Such a lease may be a perfect option for beginning investors.