With the variety of leases available out there for landlords to offer their tenants, what’s so special about the triple net (NNN) lease? How can a triple net lease save a landlord money and hassle? Does it offer any additional benefits compared to other types of leases? What should landlords know about an NNN 1031 Exchange when a property is sold?
Here are the answers to all those questions.
The Basics of the Triple Net Lease
If you’re a landlord of a freestanding commercial, retail, or medical building, then you should take the time to get to know all about the triple net lease.
The triple net lease features a structure where the tenant pays for the operating expenses associated with a property. This lease will typically have an initial term of at least 10 years, and rent increases are built in. Most likely, the contract will include a smaller lease payment, but the upkeep costs will be the responsibility of the tenant.
Therefore, when a tenant signs this lease, they pay for the occupancy of their space as well as the following three items, wrapped up into one monthly rent payment:
- Property Taxes
- Insurance
- Common Area Utilities (CAMS) such as a lobby attendant, janitorial services, and utilities
While a triple net lease is often signed by a single tenant renting an entire building, it can also be used in buildings with multiple tenants. When this is the case, each tenant’s
monthly payment of the three “nets” is usually calculated based on their proportionate
share.
Benefits of the Triple Net Lease
While the downside of a triple net lease is a lower monthly lease payment made to the landlord, the benefits will most likely far outweigh the difference in income. Triple net leases tend to be quite landlord-friendly for the following reasons:
- Fluctuations in property taxes, increases in insurance rates, and unpredictable maintenance expenses are all taken care of by the tenant.
- The NNN lease amount can fluctuate from month to month and year to year to keep up with operating expenses. This helps to decrease risk to the landlord.
- Since expenses are passed on to the tenant, the landlord’s income stream is steady and predictable.
- NNN leases are signed for 10+ years as an initial period and have rent increases built in, so lease renewals and rent negotiations/adjustments don’t come up very often.
- Landlords enjoy a relatively hassle-free investment due to the low management requirements.
Although the above-mentioned benefits are excellent, there are a few risks to be aware of before signing the triple net lease.
- Not all expenses associated with a property are covered under the NNN lease. For example, accounting and legal costs are still the responsibility of the landlord.
- If the NNN lease is used for a single-tenant property, there is a tenant credit risk. If the tenant goes bankrupt, the landlord will be left with a property that is 100% vacant.
- Since some triple-net leased properties sell toward the end of the term, there is the risk of releasing. This could present tenant rollover risk if the landlord is inexperienced or unprepared.
What You Need to Know About the NNN 1031 Exchange When You Sell a Rental Property
When it comes time for you to sell your rental property, triple net leases are exceptionally liquid. This is because buyers are easily found for these types of properties.
A 1031 Exchange on a triple net lease property sale is a straightforward way to defer the capital gains, federal, and state taxes associated with such a transaction. To gain this benefit, a landlord just needs to use all the proceeds from the sale to invest in another “like-kind” property within 180 days. This can be done on multiple triple net lease properties at a time. This is especially good news for investors who want to reinvest their money from a more hands-on property into a hassle-free triple net leased property.
Contact FGG Services to get access to our entire inventory of 1031 DST properties for sale and use FGG Services for your 1031 Exchange!
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