Triple Net Lease
Commercial Real Estate
For those who read our last blog post about Mobile Home Park Investing, we discussed how the term real estate investor broadly encompasses many genres of property ownership. Continuing on the theme of analyzing the different subsets of real estate investing, another type of ownership is a triple net lease on a commercial property.
A triple net lease (NNN) is a lease agreement on a property where the tenant or lessee is responsible for paying all of the three “net” expenses – real estate taxes, insurance, and all maintenance – in addition to any other fees covered by the lease agreement such as rent and utilities. Typically, this structure is seen with single-tenant retail properties leased to tenants with high credit ratings (e.g. single building with Walgreens as only tenant). The most common corporate credit tenants for triple net leases are discount stores, fast food restaurants, auto parts outlets, and pharmacies.
From an investor’s perspective, investing in a triple net lease can often have the following benefits:
Triple net leases are often structured as long term lease agreements, and it is not unusual to see 10-25 year terms. Investors also receive the rent “net” after the expenses are paid by the tenant, which creates a predictable income stream that is not impacted by future increases in operating expenses and capital expenditures, some of which can be large and many times unexpected.
Along with the high degree of income security that comes with a triple net lease, investors should also expect to see additional rent increases over time built into the leases, which provide a hedge against inflation.
In a true triple net lease, the tenant takes control of the building, alleviating virtually all of the day-to-day management responsibilities.
Often times, large national tenants will elect to conserve their capital and instead of purchasing their own properties, they will execute long-term triple net leases. Freeing up this capital enables these companies to invest more in the other critical aspects of their own businesses, which could include acquisitions, paying down debt, or simply diverting capital to more productive capacities. While an investment-grade credit rating does not indicate a risk-free investment, investors can often benefit from the large stable of reputable corporate tenants that typically operate using triple net leases.