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Who Pays What in a Triple Net Lease?

For many years, the Triple Net (NNN) lease has been a popular investment option for investors seeking to own high-quality commercial real estate that can provide relatively stable income with minimal risk. NNN lease investments are also attractive to investors who prefer not to be responsible for day-to-day property-related expenses and management.

What is a NNN lease, and who pays what?

A NNN lease is a contract between a property owner and a tenant where the tenant pays its pro-rata share of all operating expenses in addition to paying rent.

Costs Paid by Tenant

Depending on how the lease agreement is structured, the tenant is usually responsible for paying all costs associated with:

  • Property Taxes
  • Maintenance Costs
  • Insurance
  • Utilities
Costs Paid by Owner/Landlord

While a NNN lease is generally considered a passive real estate investment where the owner has very few responsibilities and minimal overhead costs, there are certain costs that the owner is usually responsible for. Those include:

Mortgage Payments

If the property is financed, the owner is responsible for the monthly mortgage payments and any related financing fees. 

Structure Repairs

While the tenant is generally responsible for day-to-day maintenance expenses, the owner may be required to cover the costs for structural repairs and major property upkeep for areas like the roof, exterior walls, and plumbing/electrical repairs. 

Other Lease Structures and Property Types

The NNN lease is not the only type of lease structure available to owners and tenants. Other types include:

  • Gross lease where the tenant pays the base rent and nothing more.
  • Single net lease where the tenant is responsible for only paying the base rent and the property taxes.
  • Double net lease where the tenant pays the base rent plus property taxes and insurance.

These different lease structures are designed to meet specific owner/tenant requirements, but the NNN lease remains one of the most popular types.

Triple Net leases are used for various investment properties like office, industrial, retail shopping centers, and free-standing buildings. A triple net NNN investment opportunity could include a portfolio of different properties or a single free-standing property leased by one tenant, known as a single tenant net lease.

NNN Lease Benefits

For investors, NNN lease investments offer the potential for long-term income stability with the opportunity for capital appreciation on the investment when the property is sold. Also, as a passive investment, investors have less responsibilities for the management requirements of the property than with other investments. 

Owners often see NNN leases as beneficial because they can be a reliable source of income since many tenants are often nationally recognized companies with excellent credit ratings, and lease terms can be as long as 20-25 years. Owners also can keep overhead costs low and have a less active role in managing the property.

Tenants benefit from NNN leases because they can brand and customize the space to meet corporate requirements for a consistent customer experience. Also, NNN leases are typically structured so that rent, tax, or insurance increases are well defined and capped, which helps eliminate any expense surprises over the lease term.

Potential Risks

For tenants, the most significant risks of a NNN lease relate to the potential of unforeseen maintenance costs and expenses. Tenants often request that leases are structured to include caps on maintenance repair items, especially on HVAC, plumbing, and electrical repairs. Tenants also face the risk of changing demographics or market conditions that could negatively impact sales.

On the other hand, owners face the risk of sizable structural property repair expenses that the tenant demands be addressed. Owners also face the possibility that a tenant could default on the lease or not renew. Thus, the owner would lose the rental income and incur the costs of taxes, insurance, and utilities while trying to secure a new tenant. They would also incur unanticipated re-leasing costs.

Landlords must also remain vigilant to ensure that their tenant is performing their required responsibilities per the lease terms. We have managed many NNN properties at First Guardian Group and recommend that our investors allow us to perform periodic detailed engineering studies on property condition and hold tenants responsible for any discovered deferred maintenance items. Failure to perform simple duties like changing air conditioning filters or properly maintaining grease traps can lead to very expensive repairs and possible litigation if disagreements arise regarding related responsibilities. 

Finally, in periods of rising inflation expectations such we may now be experiencing, properties with net leases with built in annual rent caps on rental rate escalations may not keep pace with rising costs and could result in a negative impact on equity at time of sale.  

More to Learn

The NNN lease has been a fundamental contract structure for commercial property owners and tenants for decades and has endured because it offers attractive advantages for both parties. As an investor, NNN lease properties provide investors with the ability to own close to hassle-free properties that can provide long-term stable income and the potential for growth on your investment.

If you would like to learn more about NNN lease properties or other real estate investment options, please contact us today. 

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Paul Getty

Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $3 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student, and senior housing. Paul’s transaction experience includes buy and sell side representation, sourcing and structuring of debt and equity, workouts, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions. Paul also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals. Prior to founding First Guardian Group/FGG1031, Paul was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 35 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion-dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M. Paul holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered financial representative with LightPath Capital Inc, member FINRA /SIPC. Paul is a noted speaker, author, and actively lectures on investments, sales, and management related topics. He is author of The 12 Magic Slides, Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors, and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.

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