A net lease is a unique type of lease contract that places some or all of the costs that are usually borne by the landlord (the lessor) on the tenant.
A triple net lease is also referred to as an NNN lease, or a net-net-net lease and basically requires the tenant to pay a net amount that includes the property’s rent as agreed, the net insurance on the property, the net maintenance costs for common areas, and the net taxes on the property.
There are two other types of net leases, which are the single net lease, and the double net lease. The single net lease normally requires the lessee to pay the rent and taxes on the property, while the double net lease typically obligates the tenant to pay the property taxes, the real estate insurance costs as well as the rent
Difference between a net lease and a gross lease
Most residential tenants are familiar with the common lease agreements that require tenants to pay the landlord a gross sum at the end of the month as opposed to making separate payments for the insurance, taxes and maintenance costs of the property.
The main difference between a “gross lease” and a “net lease” is that a gross lease contract requires the tenant to pay the landlord a fixed amount every month without paying for any of the additional costs associated with owning real property. However, this does not mean that tenants with gross leases do not pay for the associated property costs because in most cases, the rent stipulated in a gross lease is usually much higher than the rent quoted in a net lease in order to cover the extra charges.
How to invest using triple net leases
The popularity of triple net leases in commercial real estate has grown among landlords (investors) who have multiple commercial properties leased by a single tenant. Such landlords typically require the tenant to enter into a triple net lease for each of the properties they are leasing, which relieves the landlord of the responsibility of the daily management of each of the properties.
Triple net leases are mainly offered to tenants who are already generating significant revenues and have stable cash flows, which means that they are unlikely to default on their lease obligations. Examples of such tenants include banks with stable finances, real estate management firms that lease and operate entire buildings, shopping mall operators, restaurant chains and pharmacies that operate free-standing buildings among others. Such lease contracts normally have a term of between 10 and 15 years with periodic rent increases being specified within the lease contract.
Advantages of investing in triple net leases
Firstly, landlords who lease out their buildings through triple net lease agreements immediately transfer responsibility for the property’s daily management to the tenant. Secondly, triple lease investors can easily roll over their investment capital from the sale of a triple net lease property into a similar project tax-free by utilizing a tax structure known as the 1031 exchange to defer capital gains taxes.
However, only accredited investors are allowed to invest in triple net lease investment products as they are regarded as sophisticated investors. Retail investors can access such investments through real estate investment trusts (REITS) whose portfolios include such properties.
