For investors new to commercial real estate, one of the most common questions we hear is, what are triple net lease properties? Triple net lease properties, also known as NNN properties, are one of the most passive forms of real estate investments. Under a triple net lease the tenant is responsible for all of the expenses associated with owning the property. This includes taxes, maintenance, management, utilities, insurance, etc. When all of these expenses are included in the lease, the investor ends up with an investment that is much less management intensive than other forms of real estate.
Types of Triple Net Lease Properties
Retail, office, and industrial sectors of commercial real estate all have triple net leaseproperties. Retail properties are the most common type of property leased under triple net terms. When most investors thing of net lease properties they think of either single tenant net lease properties or multi-tenant retail properties. However, that doesn’t mean that there’s not plenty of opportunity for an investor to acquire a net leased office or industrial property.
Who Invests in Triple Net Lease Properties?
Triple net lease properties appeal to a wide variety of people and corporations. Foreign investors, high net worth individuals, REIT’s, and risk adverse investors are drawn to triple net lease properties. A lot of activity for NNN properties also comes from people who are selling their multi-family investments and need a place to park their money. A large number of 1031 exchanges occur for triple net lease properties.
Benefits of Owning
NNN properties appeal to investors because they are management free. They also offer astable return and are secured by major corporations. Many corporations on the Fortune 100 list lease real estate from private owners. Leases backed by gigantic corporations ensures that the owner will be paid on time and in full. Long lease terms of between 10 and 25 years are regular, which adds more security to the owner’s investment.
Downsides of Owning Triple Net Lease Properties
Like anything else, net lease properties also have their share of downsides. Long lease terms can become a burden if rent rates in the market increase. Owners can get stuck renting out the building for significantly less than market price, leading to a reduction in net income.
Inflation is another threat to property owners. Most leases are either flat during the duration of the lease of have fixed rental increases. If inflation occurs, an owner has no recourse to raise rents.
Finding a suitable replacement tenant can prove difficult for triple net lease properties. Many properties are constructed as build-to-suit properties. This means that the building is designed specifically for the tenant. If the tenant decides not to renew their lease when the initial term expires, the owner is put into a difficult situation. A lot of time the potential tenants who would be willing to occupy the property are unable to pay rent that is comparable to what the previous tenant was paying. As a result, the owner’s net operating income will be impacted significantly.
Triple Net Lease Properties Summary
Under the right circumstances, net lease properties are an excellent investment option. They can also turn into a poor investment quickly if the buyer doesn’t know the market well. It’s also a good idea to sit down and share your investment objectives with someone who knows the market well. They can help determine if the investment makes sense based on your goals and risk tolerances. Additionally, they can help determine which triple net lease properties align with your portfolio goals.