Unlocking NNN Leases: Mailbox Money Riches

In the world of commercial real estate, Triple Net Leases (NNN) have emerged as the ultimate “mailbox money ATM” for property owners and investors. This popular lease structure offers a consistent stream of income with minimal risk, making it an attractive option for both landlords and tenants. 

But what exactly is a Triple Net Lease, and why is it considered a win-win situation for both owners/investors and tenants? Let’s delve into these questions.

What is a Triple Net Lease?

A Triple Net Lease is a lease agreement where the tenant agrees to pay all three of the property’s expense categories in addition to the base rent. The NNN in a Triple Net Lease stands for Net, Net, Net, which represents the three major expense categories which include property taxes, insurance, and operating expenses, sometimes referred to as Common Area Maintenance (CAM) charges.

Who pays the NNN expenses?

In a triple net lease, the tenant is responsible for paying all three types of expenses mentioned above. This means that the property owner is relieved of these financial responsibilities, and can pass on the costs to the tenant. This structure is particularly attractive for property owners who want to minimize their own expenses and have more predictable cash flows. These expenses are often collected 1/12 at a time by a management company along with the base rent.

What are the benefits to the owner?

There are several benefits to property owners who use triple net leases.

  • Firstly, the owner is able to transfer most of the operational costs of the building to the tenant. This means that the owner is able to budget more effectively, as they are not liable for unexpected expenses. 
  • Secondly, NNN leases can generate higher returns for the owner, as the tenant is responsible for the majority of expenses.
  • Lastly, NNN leases tend to attract long-term tenants, as they have more predictability over their costs. This, in turn, leads to more stability in the owner’s cash flow.

What responsibilities does the owner have to pay for in a NNN lease?

In many lease agreements, the property owner is responsible for all operating expenses associated with the building. This typically includes property taxes, insurance, and maintenance, in addition to utilities, common area expenses, and repair costs. The tenant is only responsible for their monthly rent payment. By contrast, in a triple net lease agreement, the tenant takes on most of these costs, freeing up the owner to prioritize other areas of the business.  On a NNN lease, most often the owner is responsible for costs associated with the roof. Parking lot replacement, and any foundational structure issues.

What is the difference between a NNN lease and an ABSOLUTE NNN lease?

An absolute NNN lease, also known as a bondable lease, is a variation of a triple net lease where the tenant takes on even more responsibilities. Specifically, the tenant is responsible for any repairs or replacements that may be necessary during their tenure – even those that are beyond normal wear and tear. While these types of leases may be less common, they tend to be attractive to property owners who want to minimize their maintenance costs even further.  Essentially, in most NNN leases; the owner has no financial obligation and the tenant is 100% responsible for all expenses including the roof, parking lot, and foundation.

Facts & Stats:

  1. Long-term Occupancy: The typical tenant in a Triple Net Lease structure is a long-term occupant looking to invest more into its space. 
  2. Common Tenants: Triple Net Lease tenants are usually established businesses such as chain restaurants, retail stores, and banks.
  3. Lease Duration: Most Triple Net Leases have a primary term of 10-20 years, often with multiple five-year renewal options and built-in rent increases at five-year intervals.
  4. Tenant Control: With an absolute Triple Net Lease, the tenant has more control over the property’s maintenance, insurance coverage, and management. This is because the tenant directly handles the expenses, they can choose the insurance policy, control the maintenance quality, and have more influence over the property’s operations.
  5. Low-Risk for Owners: As far as owners are concerned, Triple Net Leases are a low-risk and reliable source of income that have few overhead costs, and no cost for absolute NNN leases. Many of the burdens of a landlord are also removed, as most Triple Net Lease scenarios don’t even require owner input in regards to the daily management of the property.
  6. Common in Retail and Office Sectors: While any type of commercial real estate can have a Triple Net Lease tenant, they are most common in the retail, office sectors, and industrial.

Key Takeaways:

In conclusion, triple net leases have become increasingly common in commercial real estate deals as a way to minimize risk and generate higher returns for property owners. By understanding the benefits of NNN leases, owners can structure their lease agreements to be more favorable, while tenants can benefit from greater transparency over their expenses. As such, triple net leases are an important tool for any investor who aims to grow their commercial real estate portfolio.

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