What do the Starbucks on the corner, the Dollar General on the south side of town, and the bank in the regional shopping center have in common? They’re all classified as “retail.” And there’s a good chance that all of them operate under some kind of net-lease agreement. There are three types of net-lease agreements, ranging from single-net to triple net, or NNN.
For certain real estate investors, NNN property ownership could be a good strategy, as that asset can come with few ownership costs or responsibilities. The large expense involved with such a property is the purchase price. There could be other costs to the owner as well.
A Triple-Net Primer
What, exactly, is a triple-net lease? The short answer is that it’s a lease agreement or arrangement that places the costs of running and maintaining the property in the hands of the tenant.
The longer answer is that a triple-net lease arrangement means the tenant is responsible for the three “nets” of taxes, insurance, and maintenance. This means the occupier of the space might pay property taxes directly to the municipality. That same occupier also pays the insurance fee—again, directly to the agent or company in question. And, in the event of a leaky roof or broken window, the tenant pays for these and other repairs.
Now, there are degrees within a triple-net lease. For instance, an absolute NNN lease means the tenant is responsible for all property-related risks. This can include rebuilding a property in the event of a destructive event.
Regardless of the NNN lease structure, the arrangement is in place to potentially remove much of the commercial real estate ownership administrative burden from the landlord. However, a successful triple-net lease should rest on a credit-worthy tenant.
Landlord Costs
While the NNN lease, by its nature, suggests that ownership means no expenses, this isn’t always the case. Unless the lease agreement specifically spells out the tenant’s responsibilities, triple-net property landlords could find themselves paying for the following:
Structural Issues
Most NNN leases indicate that occupiers take on the role of fixups and in some cases, deferred maintenance. Tenants also are responsible for the daily operating costs of their location. But more serious issues, such as total roof destruction, severe foundation issues, black mold, or rotting drywall could fall under the category of “owner expense.”
Loans or Liens
While it’s possible that some landlords/property owners will finance the purchase of a NNN property out of their own pockets, many more will require a mortgage from a lender to buy that asset. The owner is responsible for paying back that mortgage, along with interest, fees, or additional liens on the property.
Property Insurance
Again, while the tenant might be responsible for paying municipal or county property taxes, the asset itself requires some kind of property, replacement, or casualty insurance. Depending on how the lease agreement is structured, the owner could be responsible for paying insurance premiums or deductibles.
Agreements and NNN Cost Variations
While the assumption with NNN leases is that the tenant assumes most of the expenses involved with occupying and operating in a real estate space, the landlord’s cost responsibilities depend on the lease agreement. Because of this, everything should be spelled out in the agreement, whether full-service or triple-net.
