Real Estate Investing: Triple Net Lease
A net lease refers to a lease agreement where the lessee is responsible for paying the property taxes, maintenance, insurance, for the utilities and for the janitorial services. Of the net leases, the most common type is a triple net lease.
Triple Net Lease or NNN Lease: A triple net is also known as a NNN lease. As per a triple net lease, the tenants are responsible for operating and maintaining the property as well as the common area maintenance, which will be divided among the tenants in proportion to the area they rent. The landlord is responsible only for the structural integrity of the building. The tenant pays the landlord a base monthly rent and is responsible for the maintenance and the operational costs of all utilities as well as that of the property. The tenant has a few legal defenses to relieve him of his responsibility while using a triple net lease.
Absolute Triple Net Lease: It is also referred to as a bond lease. It is similar to a NNN lease, but differs in that the tenant has no legal defenses if he fails to meet his responsibility of paying the maintenance and operational costs, property taxes and insurance, utility and janitorial expenses etc.
Investors dealing in commercial real estate look out for multi-tenant properties that have triple net leases, as all they have to do is deal with how to invest the rent paid by the tenants. They like properties with triple net leases as they are not bothered by management obligations and have an assured income. On finding such a property, they have to take extra care with the due-diligence and study every document relating to the building as well as study the lease agreement in detail seeking the counsel of an experienced attorney.
Triple net leases have to be carefully drafted to compensate for inflation as well as tax increases, which could influence the rent and thereby affect the lease. The landlord should be very careful in selecting tenants by checking their credit worthiness, the type of business they do and how it will have a positive or negative impact on the property has to be analyzed carefully. If an investor is buying a property with a triple net lease tenant or tenant, the lease agreement has to be carefully scrutinized and the lease term has to be checked, and then carefully reviewed to see if the existing tenants would agree to an increase in the base rent as well as check the credit worthiness of the tenants. It is an investors dream to land a multi-tenant commercial property with a true triple net lease but they are a rarity.
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