It's always better to start from the very basic level to understand the things that need higher level of understanding. Hence, we define what exactly a net lease is. This term is constantly used in real estate, where besides the rent, the tenant has to pay some or all of the property expenses, which otherwise would have been paid by the property owner.
The expenses include maintenance, repairs, taxes, etc. There are actually three kinds of leases. They are:
- Single Net
- Double Net
- Triple Net
Triple Net Lease
A commercial rental agreement of the property in which the tenant has agreed to pay all real estate taxes, insurance, all the maintenance, etc., in addition to the conventional fee (e.g. rent) that are under agreement, is known as triple net lease (also referred to as Net-Net-Net or NNN).
In such cases, the tenant is responsible for all the expenses or cost that may be hidden or visible. In short, he is accountable for all the ownership expenses, leaving the owner free from such hassles.
Normally, most of the NNN are between 10 to 25 years. In many modes, income from the net lease are like payments which the lender receives from an owed loan to a homeowner. The rent continues for a full term of net lease, making credit rating of the tenant extremely crucial.
- Properties that come under such agreements alleviate the owner from the everyday management hassles.
- The owner gets a steady income paid by an investment grade tenant.
- NNN properties are generally built for retailers who have researched the market to find middle income areas and hence, have high residual value.
- Getting a mortgage loan at favorable rates becomes easier for long term rent, if the tenant has good credit rating.
It has been frequently used for large properties, because of its benefits on taxes, cash flow, etc. However, agents have started using the lease in properties rented by small tenants (low value properties). Generally, property is rented for a long term but leases for 2 to 6 years are becoming popular nowadays.
Sometimes, this form of rental agreement may be risky for the owner, when the tenant isn't able to pay the fees. In extreme cases, a tenant may damage the building purposely to collect the insurance money. This is the main reason why some of these rental agreements include a reserve fund.
In this case, the tenant has to make regular payments to the reserve fund, that can be used to compensate at the time of an emergency. The terms of agreements are sometimes made tougher to protect both the parties, in an emergency situation.
At any point of time, when considering rental options as a landlord or tenant, always read the full agreement before signing it. However, consulting a lawyer specializing in real estate is the safest bet.
Disclaimer: This information is for reference purposes only and does not directly recommend any specific financial course of action.