Tap to Read ➤

Triple Net Lease Agreements

Aparna Iyer Jan 22, 2019
Triple net lease agreements are advantageous to lessees and lessors of commercial income-generating properties. Businesses have a number of commercial leasing options of which NNN is popular on account of the reasons mentioned herein.
A lease contract that requires the lessee (tenant) to pay all ongoing expenses, i.e., property taxes, building insurance, and the cost of common area maintenance, in addition to paying a regular rent is known as a triple net lease agreement. Utilities and the cost of repairs also have to be borne by the tenant.
By definition, its structure requires the lessee to pay the net amount of property taxes, building insurance, and cost of common area maintenance. It is also known as net-net-net lease or NNN. As against tenants' commitments, landlords are only responsible for the roof and structure of the leased property and may occasionally be expected to pay for parking.
A type of commercial leasing document, a triple net lease is one among many leasing options. Another, though diametrical, concept is the gross lease agreement. The gross lease agreement is one in which the lessor or the landlord pays all the expenses of the residential property that has been rented.
The rent payable is discussed beforehand, following which the agreement is made specifying the duties, responsibilities, and restrictions the tenant would have to adhere to.
If the code of the conduct specified by the agreement is not followed, it may lead to the lessor terminating the tenure before time; i.e., even if the agreement is deemed valid for a longer period the term of lease would endure a truncation.
Thus, it is evident that triple net lease agreements are not meant for residential properties, since the landlord, virtually, has no responsibilities. The tenant has to pay the amount of rent in addition to a number of other expenses that are normally borne by the landlord in a standard residential lease agreement.

The Working

Besides NNN lease, the triple net lease is also regarded as the true net lease.This is due to the policy of the agreement that the lessor does not share any monetary responsibility with the the lessee to upkeep the property. This means the lessee has to maintain the property as if, it is his own.
It, predominantly, is due to this reason that the lessor is keen to rent his commercial property on a triple lease agreement. However, the lessee -- though he carries the responsibility of the upkeep of the property -- too, benefits with the proposition at hand.
He obtains the right to an acting ownership of the property. Besides, he gets an authority of sorts of the property without heavy capital investments that he would have incurred had he planned to acquire a new property.
Commercial lease agreements have become popular on account of a number of advantages that accrue to the lessee as well as the lessor. Typically, NNN leased properties are single-tenant retail properties, although the leased asset may be used as a single-tenant office or an industrial building.

Advantages

The lessee is a corporate entity that has a high credit rating and is interested in leasing the property for a period of 10 to 25 years.
A high credit rating reduces the chances of default and ensures that the lessor receives a steady stream of income without having to bear the cost of operating expenses and capital improvements. These corporate entities make great tenants, who maintain the property in a manner that befits their corporate image.
To apply for a commercial loan, for triple net financing, one needs to be aware of the lease rate. The lease rate is quoted in dollars per rentable square foot. It can be determined by working backwards from the value of the property and assuming the cap rate and adjusting the net operating income to arrive at the annual gross income of the rental property.
REITs are good investments for people, with limited capital, who are interested in long-term secure investments that yield a steady source of income. Moreover, the credit worthiness of the tenant reduces the chances of default.
The lessee also benefits from commercial lease agreement, since the tenant can retain control of the asset without actually owning the same, thus reducing the required capital investment. The tenant, thus saves on real-estate venture capital that can be used for other purposes.

Disadvantages

Although, the lessor of triple net lease properties is entitled to receive a steady income in the form of rent, the rent is at best inflation adjusted. In other words, the rent of comparable properties may increase at a faster pace as compared to the rent of triple net lease properties.
While calculating depreciation for residential rentals, the asset is depreciated over 27½ years. Triple net lease properties, on the other hand, are commercial properties that have a depreciable life of 39 years. In other words, the tax shelter for residential rentals is much higher than that of commercial rentals.
Triple net lease (investments) properties are good investments for people, who are willing to forgo some amount of liquidity in exchange for a steady stream of income.
This is because commercial properties are much harder to lease as compared to residential properties and a long term vacancy, on account of a slump in the market, will have disastrous consequences for investors with less liquidity.

Calculating Present Value

Prior to investing in real estate, investors should determine the value of the income generating property. This is done by using the capitalization rate or the cap rate and determining the present value of the investment. The cap rate is inversely proportional to the term of the triple net lease and the credit worthiness of the tenant.
Present Value of the Real Estate Investment = NOI/Cap Rate

NOI = Gross Income - Vacancy and Collection Costs - Replacement Reserves
Lessors and lessees should take a look at free triple net lease agreement documents before deciding on such an agreement. Although, the Internet is the primary source of free information, the chances of stumbling upon a free template is extremely rare.
A number of websites, however, allow the user to download sample triple net lease agreements for a nominal price. Nevertheless, before considering a triple lease agreement, read the subject matter carefully.
The terms and conditions pertaining to the rules, regulations, restrictions, and stipulations must be agreed upon by the lessee and the lessor. If you are not well acquainted with the regulatory procedures, ensure that you appoint a lawyer, who would look into the legal justifications mentioned in the document.