What is the downside of a triple net lease?
What is the downside of a triple net lease?
When you purchase a property with an already existing NNN lease agreement, that means you get the terms of this contract as it was defined at the beginning. You need to be attentive when deciding to buy a house or building for making business to know your rights and what conditions are set in the agreement. Also, by knowing the details of a triple net lease, you’ll succeed in getting some advantages for investment or creating a winning business.
NNN lease of commercial space is an attractive form of agreement for investors, which can promote their income rate if knowing specific features of this contract. A triple net lease, known as NNN lease real estate agreement, may provide beneficial opportunities for investors and tenants to gain their financial objectives. To find out triple net lease advantages and disadvantages, you should understand first what it is, its peculiarities, types, and differences between them.
Choosing a proper net lease agreement type will back up investments and guarantee long-term benefits. A triple net lease is an agreement between a renter and tenant where the latter undertake all the expenses for the property, including monthly rental fee, property taxes, insurance, and costs for its maintenance or repairs.
Also, there’s a single net lease which means a tenant is committed to paying for property taxes only. At the same time, the owner serves as a landlord and must cover the expenses and maintenance of the investments. In the case of a double net lease, a tenant is obliged to pay property taxes, insurance, and claims on it, additionally to monthly rent.
Also, the fourth type of net lease real estate exists – the so-called absolute NNN lease – which means almost the same as in the case with a triple agreement: a tenant is required to pay for taxes, property insurance, maintenance, and repairs, including repairing of the building structure and roof in case of emergency may happen.
What is the downside of a triple net lease for a tenant and renter?
Now, let’s outline the benefits of a triple net lease, both for an owner and tenant:
Warranted and long-term demesne for a tenant up to 20 years. It’s profitable to an investor because there’s no risk or loss of a vacant property.
Low-risk investment due to the fact that a tenant is obliged to cover the costs of the property rent, taxes, insurance, and maintenance expenses.
Getting a secure and firm source of income means getting a defined amount of property rent monthly for a long period.
A long-term business location that enables tenants to get a stable and recognizable place for their venture.
A chance to get tax benefits for your business.
All responsibilities come to a tenant that enables investors to buy property across the country.
Alongside the positive impact of the NNN lease, observe its cons that can lead to:
Fixed amount of investment because of the fixed rent value for the whole term of the agreement. So, the owner can’t change it for a higher rate, and it results in their earning limitation.
Additional property expenses for a tenant that make them have a solid credit profile to uphold all the financial expenses fully that won’t influence their business activity.
Other tax liabilities payment for a tenant because they must pay property taxes annually, including fines and penalties for the remittance.
However, if you’re a value-add investor who wants to boost your own income potential, the NNN lease contract isn’t a perfect option for you because of the fixed rates. Nevertheless, a triple net lease can bring some positive points – considering that a tenant must pay for rent, property taxes, insurance premiums, and also costs of some structural maintenance, a landlord can set a lower rent charge.
Another vital fact about the NNN lease: because the maintenance cost can be higher than expected, a tenant will try to get a rent concession. To prevent it, the majority of landlords prefer bondable net lease contracts. Its main condition is the inability to terminate it ahead of the expiration date and the rent cost can’t be changed.
Speaking about location maintenance, there can be some issues for a tenant. For instance, if the building is in perfect condition, a tenant will pay a small amount for its maintenance and benefit from a lower rent price. But, if the building is in poor condition, it’s necessary to have greater expenses to repair a roof, walling, or cladding. In both cases, a tenant should open the purse for structural maintenance.
Other spendings go for paying insurance: deductibles and payments in case of uninsured damage. But, if a tenant can’t pay it, there’s no option to cancel it. They should ask not to file a claim and announce bankruptcy.
What alternatives to the NNN lease exist?
Are there other variants of contracts between a tenant and renter? Yes, there’re several alternatives for the NNN lease agreement: gross and percentage leases. The first type means that a landlord is obliged to pay property taxes, insurance, and maintenance, while a tenant must cover monthly rent, which is notably higher. It can occur that a tenant also is required to pay the utilities.
The second type, a percentage lease, means that a tenant pays a basic rent price and percentage of earnings in retail spaces like shopping centers. What’s more, it’s profitable both for a tenant and landlord. Alongside this, a landlord helps choose a fitting space for businesses. Consequently, a tenant gets more sales, which brings a landlord some profit.
So, is a triple net lease a worthy idea? Generally, yes, it can’t be separated from some cons both for tenants and landlords. With the right approach, a tenant can benefit due to a proper location of the property that directly influences their income and makes success for a venture. Given an objective viewpoint, with a wisely negotiated triple net lease contract, a tenant will get the commercial area in the fitting location that will enable them to increase their profit.
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