What is the Difference Between Net and Triple Net Lease?
What is the Difference Between Net and Triple Net Lease?
Under the terms of a net lease, the tenant pays an amount for the base rent, which will be added to one or other of the categories of expenses indicated above, generally property taxes.
The Triple Net Lease (hyper net or net net net)
A triple Net lease may be beneficial for both a landlord and a tenant, but does it come with downsides along the way? Now, let’s explain some of the most important pros and cons of triple net leases from both the landlord’s and tenant’s point of view.
The ‘true triple N’ or ‘absolute NNN’ lease is considered the most binding of the triple net lease variations. In this type of lease, the tenant is responsible for any expense related to the property whatsoever. If the property is damaged, the burden falls on the tenant to rebuild it, regardless of whether the insurance covers it or not. Thus, a triple net lease is a type of lease in which the tenant is responsible for the expenses of the property in addition to the gross rent. The expenses that are usually paid by the landlord must be paid by the tenant until the end of the lease.
Property taxes that the government collects.
Property insurance that helps protect property from unexpected damage.
Maintenance costs to maintain and improve the property.
This type of lease is usually appropriate for offices, retail stores, restaurants, and other businesses, such as gas stations. It is often referred to as a Triple N lease or simply an NNN lease.
Usually, this lease lasts for ten years. However, some tenants sign up for up to 25 years from the start.
How a Triple Net Lease Works
A triple net lease may seem a bit complicated, but it isn’t necessary. It is very popular with commercial real estate investors across the country. Just like a normal lease, the tenant would agree to pay a monthly rent for the property based primarily on the value of the property. This could be fixed rent for the entire rental period or have a fixed increase at the end of each year to take into account inflation. This is usually 3% of the initial rent. In addition to the gross rent, the tenant also agrees to pay the property tax, property insurance and any other specific or general property expenses. This essentially prevents the owner from taking care of these affairs. These terms are usually negotiated with the help of a broker.
Triple Net Lease Pros
As there are two parties involved, it is important to know the triple net leases pros from both perspectives, as a landlord and as a tenant. There are pros and cons for both parties involved.
Pro for the Owner
The single biggest benefit of a triple net lease to owner is long-term occupation of the property with steady income. If you have set a flat rent or a fixed rate of increase for the monthly rent, there will be money coming in your pocket. It is a constant income that the owner can use to grow their capital. Most of the signed agreements last more than 10 years.
Unlike a traditional lease, the owner is free from all ownership responsibilities. Whether it is property tax or physical property care, the owner is free from any managerial work. This hassle-free nature of a true triple N lease makes it a very attractive option for commercial property owners.
The rental income is separate from the actual rent
The gross monthly rent that the tenant pays directly to the owner is separate from all other property expenses that the tenant bears. Even if for the tenant, all expenses related to the property are one, for the owner, it is only the rent they are receiving.
This makes it easy for them to keep their books. If all payments, including taxes and maintenance costs, were to go through the owner, the finances of the deal would be quite complex.
Pro for the Tenant
When choosing this type of agreement, the tenant pays a reduced gross rent. Since the tenant is responsible for all other expenses related to the property, the rent is lower. In comparison, the rent would be higher if the lease did not require the tenant to pay the property tax, utilities and insurance directly.
As a tenant on a triple net lease, you are also responsible for maintenance and repair costs. This gives you more control in your hand in terms of choosing which repairs to complete and which contractors to hire. The tenant can decide and implement the necessary improvements to the property that would allow their business to grow and increase their income. Likewise, there is more control over utility expenses. They can manage the utilities and pay the actual costs. Unlike a high rental rate designed to cover utilities, this ends up saving the tenant money.
Triple net leases are common for properties located in high-value areas with increased traffic and exposure. For example, commercial real estate in the downtown metropolitan area would be for a triple net lease.
These types of areas have very high growth rates. Companies can generate high revenues with their presence in such a privileged position.
Regardless of the title of the commercial lease, a tenant and a landlord always have an interest in specifying the distribution between them of the various current or exceptional expenses related to the building covered by the commercial lease.
For a tenant, all types of net leases allow him to better control certain costs and aspects of the building, but, in return, all are, for him, a source of additional responsibility. For example, if the tenant bears the cost of maintenance, he can choose his supplier and thus control the cost of this expense. However, it is very likely that the landlord, in such case, provides a minimum level of quality with regard to such maintenance.
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