Legal Considerations for Triple Net Lease Agreements: Key Clauses To Know
When entering into an NNN (triple net) lease, the lease agreement is a critical document that outlines various aspects of the arrangement. The structure itself transfers responsibility for property taxes, insurance premiums, and maintenance costs to the tenant, but these aren’t the only terms that exist in such an agreement. In this article, let’s examine the legal considerations beyond who pays for the three net operating expenses. Let’s take a closer look!
Understanding Depreciation in Triple Net Lease Investments
Investing in triple net lease (NNN) properties can provide immense financial relief for investors like yourself. Since you’re no longer paying for property taxes, insurance premiums, and maintenance costs, you’re less exposed to market volatility. Beyond these advantages, there are other ways you can ease financial burdens — especially with personal income tax. One method is property depreciation, which naturally applies to NNN leases given that a real estate asset is involved.
Tax Benefits of Investing in Triple Net Lease Properties
Triple net lease (NNN) investments transfer three net operating expenses to the tenant: property taxes, insurance coverage, and maintenance costs. This structure alone provides tax benefits to the landlord since they’re no longer responsible for paying property taxes, but this isn’t the only tax advantage. There are plenty of other tax benefits of investing in triple net lease properties.
Managing Renewal Risk in Triple Net Lease Agreements
In a triple-net (NNN) lease investment, the initial lease will eventually expire, and the tenant will have the option to renew. Most investors want the occupant to renew as this provides the smoothest process. However, there’s no telling how tenants will act after the lease is over. This uncertainty creates renewal risk, and being unprepared for it can result in future vacancies or disrupted cash flow.
What Happens If Your Triple Net Lease Tenant Goes Bankrupt?
The success of a triple net (NNN) lease investment largely depends on the tenant, as their stability ensures consistent cash flow to the landlord. What happens, then, if the tenant files for bankruptcy? How will they be able to pay the three net operating expenses? Would the contract dissolve as well?
Mitigating Vacancy Risk in Triple Net Lease Properties
Investors now recognize the many benefits of triple net (NNN) lease investments, such as passive income and long-term stability. However, just like any other investment, there are risks to consider with an NNN lease. One that has a significant impact is vacancy risk, which disrupts cash flow and lowers the investment's value.
