I was going through some of the posts of investors enquiring about NNN lease investment. Everyone had their concern and wanted to know about the pros and cons of investing in NNN properties. Someone had posted: ‘Could you let me know the Good and Bad about Triple Net Investment? Should I plan one?’ So, here I’m with the benefits and risks of Triple Net Lease Investment. I’ll start by explaining this unique lease structure first.
What is a triple net lease?
A Triple Net or NNN (net-net-net) lease is a single-tenant arrangement that requires the tenant to pay all operating expenses associated with the property they’ve rented. This kind of lease agreement requires a long-term commitment and may lock the tenant for 10-25 years. It is ideal for investors or property owners looking to get rid of the burden of property management. The majority of NNN tenants are big established companies such as CVS, Walgreens, KFC, etc., which is a good thing for investors. However, a triple net lease is beneficial for both tenants and investors.
The Good for Investors –
The biggest benefit that an investor receives upon signing a NNN lease agreement is freedom from property management. As this kind of lease requires the tenant to pay all operating expenses, the investor is just for bookkeeping. Along with the base rent, the expenses that the tenant bear under a NNN lease include insurance fee, property taxes, and maintenance cost. This saves the entire rent for the investor, which otherwise they would use for paying the operating expenses under a gross lease. Another benefit that NNN investors receive is a steady flow of income. As the majority of NNN tenants are big multi-national companies, it ensures a regular flow of cash for investors.
The Good for Tenants –
NNN tenants have more control over the property and they don’t need to wait for the investor’s permission to carry out any kind of maintenance work on the property. As the tenant is also responsible for paying all operating expenses, the base rent under a NNN lease is slightly less than that under a gross lease.
The Bad for Investors –
Though there isn’t much for NNN investors to worry, they could be exposed to a few risks. For example, if the property is damaged in a natural disaster, the investor will be responsible for its repair. They can’t ask the tenant to take care of the maintenance work in such condition. Neither can they ask them to contribute. It’ll solely be the investor’s responsibility to build the structure again if it’s devastated in the disaster.
The Bad for Tenants –
Fluctuation in insurance and property taxes could be an issue for NNN tenants. As they’re locked for a long-term (10-25yrs), any kind of change in the tax rate may increase their liabilities. Plus, they can’t ask for rent abatements during the lease tenure. Therefore, the tenant must discuss these things before signing the lease agreement.