What is a “Triple Net Lease” NNN or “Net Lease” and how is it used?
A triple net lease (most commonly used) or net lease requires the tenant to pay some or all of the property expenses which normally would be paid by the property owner who is also known as the "Landlord”. The tenant would also pay fixed rent as well as all or some of the expenses. These expenses can include taxes, insurance, maintenance, repairs, utilities and other items predetermined when lease is signed.
The exact items that are to be paid by the tenant are usually specified in the written lease before the lease is effective. In certain properties (that are leased by more than one tenant) such as a strip mall, the lease expenses that are "passed along" to the tenants are usually prorated to the tenants based on the size or square footage of the area occupied by that individual tenant. The actual term "Net Lease" must not be confused with the term "Gross Lease". In a “Triple net lease” the property owner will receive the rent "totally net" after the expenses passed through to tenants are all paid. In a “Gross lease” arrangement, the tenant pays a “gross” amount of rent, which then the landlord can use to pay the expenses.
Triple net leases are used in many ways and typically “Triple Net Leases” (NNN Properties) are equity investments rather than cash flow investments. A good example of this is when the investor will finance a significant portion of the purchase price (on a property) and make payments on the resulting mortgage with the lessee's monthly due rent. In this case there is usually a small amount left over as a “monthly profit” for the investor or sometimes called “positive cash flow”. The greater the investment payoff comes from the building of equity in the property and you are using the lessee's rent money to do so. After the mortgage obligation is paid off the resulting property can then be sold after this period of “equity building”. Usually this can last 5 to 20 years or the typical commercial mortgage term.
There are different types of net leases used in the commercial Real Estate industry. Written below are some of the different types of lease names used in the industry, and how they work.
A single net lease arrangement:
A triple net lease requires the tenant to pay some or all of the property expenses which normally would be paid by the property owner.
A single net lease, or sometimes shortened to net or N is when the lessee or tenant is responsible for paying only the property taxes (in addition to the actual rent). This is not a common form of leasing. Most likely a double or triple net lease would be set up by the commercial Real Estate owner or “Landlord”
A double net lease arrangement:
In a double net lease or sometimes called a Net-Net or NN lease. The lessee or tenant would be responsible for taxes (real estate) & building insurance. In this case the “Lessors” (landlords) are responsible for any expenses incurred in relation to structural repairs and “common area” maintenance. This expense is sometimes calculated as a reserve payment and an example of this would be equal to 15 Cents per square foot. A double net lease is rarely used in the Commercial Real Estate industry.
A “Triple net” NNN lease arrangement:
A triple net lease is sometimes called Net/Net/Net or NNN lease. This is a lease agreement (on a real estate property) where the tenant or lessee agrees to pay all real estate taxes, maintenance, and building insurance or sometimes called “The 3 Nets” NNN. These expenses would need to be paid in addition to any “normal” expenses that are expected under the Triple Net Lease agreement. Also in such a lease, the tenant (lessee) is responsible for all costs associated with replacement of the structural building or repairs of the real estate property. The rents are usually lower in a “Triple net lease” rather than the other form of lease agreements written above. The NNN form of lease agreement is desirable for commercial real estate investors since the overhead expenses incurred by the real estate investor are dramatically decreased due to the transfer of financial responsibility (on the property) to the lessee. This however can have some tax disadvantages for the “Lessor” or “Landlord”. Some other things to consider include what if the lease produces a loss? These losses could be disallowed as a tax benefit due to “passive loss limitations” of the IRS Section # 469 or the at risk rules of IRC Section # 465. Also the significant income usually generated from this type of lease could cause a closely held C corporation to become a Personal Holding Company per IRS Code Section 542 and this could be subject to a “special tax”. Also keep in mind an S corporation could also be affected as well, per IRS Code Section 1362d3. The use of a “Triple net lease” NNN may be a prerequisite for credit tenant lease financing. This may also permit a lender to lend to the landlord on non recourse terms and conditions.
A “bondable lease” arrangement:
A “bondable lease” is sometimes called an “absolute triple net lease” or "hell or high water lease". This is when the most, extreme variation of a “triple net lease” NNN tenant carries every possible real estate related risk (to the property). The most note worthy of these additional risks include:
- The obligations to rebuild after a casualty, regardless of the adequacy of insurance proceeds.
- To pay rent, even after partial or full condemnation of the property.
These types of leases cannot be terminable by the tenant and rent abatements are not permissible. This lease concept is created to make the rent absolutely “net” under all prevailing circumstances. This would be the equivalent obligations of a bond and hence the name "Bondable Lease”. A good real estate example of this type of lease would be a “leaseback” arrangement. This would be when a retailer leases back a building it formerly owned and then continues to run the shop. The “bondable leases” are also typically used in a "credit tenant lease". This is where the main derivative of value is not “so much” the real estate of the property, but instead it’s the uninterrupted cash flow from the usually investment grade rated tenant.
1031 Exchange made simple is dedicated to finding the sale of “Triple Net Leases” NNN Properties, "Single Tenant Leases", “Net Leases”, “Sale lease backs” which include shopping centers, strip malls and any investment properties nationwide. We have a network of Real Estate Brokers and an online database of “Triple Net Leased Properties”. We are available 15 hours a day, 7 days a week in helping you with the acquisition of Net or NNN leased properties on your next 1031 exchange. These types of properties are in high demand and 1031 Exchange Made Simple is a Licensed Real Estate broker with the knowledge and experience on how to successfully navigate the many possible pitfalls of a 1031 exchange. So contact us today!
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