Triple Net Leased Properties And How They Work

What does NNN (triple net leased properties) mean in a commercial real estate lease?

1 Answer

In a triple net lease, the tenant is responsible for all ongoing expenses, taxes, utilities, insurance payments, maintenance, and repairs. At the same time, the landlord collects monthly net rental income just as he or she would with a traditional real estate investment. In other words, a triple net lease allows the landlord to profit from leasing his or her property without any obligation to cover most of the real estate costs. (The landlord is only responsible for the roof and structure of the building, and occasionally parking.)

Triple net leases are typically long-term leases extended to national or regional retailers, such as Federal Express, Walgreen's, CVS, Blockbuster, Wal-Mart, Circuit City, and Home Depot. A financially sound corporate entity usually enters into a lease spanning anywhere from 10 to 25 years.

Triple net leased properties are popular among tenants and investors alike. The reason commercial tenants use NNN leases is simple: The leases enable them to maintain ownership control of the premises without requiring them to expend any money up-front. Most large commercial enterprises prefer to lease property rather than own it. They make this decision to save on real estate venture capital. Freed of such high initial costs up-front, commercial tenants make greater investments in other critical aspects of their businesses, i.e., financing core competencies, increasing acquisition, paying down debt, and diverting capital into more productive capacities. Recognizing that owning a significant amount of real estate is not the most productive use of their assets, companies take advantage of how triple net leases work in order to achieve greater capital gains.

Investors' interest in triple net leases is similarly well founded. Being a landlord can be quite chaotic, especially considering all the maintenance it often requires. Still worse, otherwise lucrative real estate investments can become unprofitable when the costs of upkeep and latent building expenses and repairs are factored into the situation. Triple net leases eliminate these concerns. They ensure a stable, secure, and long-term cash flow for the investor at the same time that the operating costs and capital improvements are being paid for by the tenant. This eliminates the major sources of hassle commonly associated with more management-intensive real estate holdings.

Triple net leased properties are also considered a very good investment opportunity since they are one of the most secure and liquid real estate investments available. These properties usually sell quickly, and the tenants who rent them are generally highly-qualified and have excellent credit ratings. In addition, the large commercial enterprises that occupy the real estate usually associate the leased property with their commercial identity and image. They therefore make great tenants who want their property to reflect their ideal corporate image. Moreover, they make timely tax payments, strive to keep the property in good shape, and maintain its essential facilities. The commitment of both the landlord and tenant in triple net properties facilitates the long-term appreciation of the properties and security of the parties involved.