What is a Triple Net Lease?
Triple Net Lease is a type of lease agreement between the lessee and the lessor in which the lessee or the tenant of the property agrees for not only the paying the rent and utilities expenses, but also other property-related expenses such as insurance of the building, maintenance of the building, property taxes, etc.
In simple words, a triple net lease is one of the lease agreements between the lessor and the lessee about any particular property where the lessee will be responsible for paying the property taxes for that asset, the insurance amount, and also any repair required for that specific asset during the time of lease.
Since the tenant or the lessee is paying everything that the lessor is responsible for payment, the rent of the property is usually much lower than the regular lease agreement where the owner of the property pays taxes, insurance, and maintenance. It is also referred to as net net net (NNN) lease due to its peculiar nature. Its amount is calculated by using the capitalization rateCapitalization RateCapitalization Rate is the rate that helps determining value of a real estate investment. It projects the expected rate of return on the investment made. . And this rate depends on the creditworthiness of the particular lesseeLesseeA Lessee, also called a Tenant, is an individual (or entity) who rents the land or property (generally immovable) from a lessor (property owner) under a legal lease agreement. .
Triple Net Lease Investment
It is a great investment instrument. But it’s beneficial when the investor follows a few rules. Let’s have a look at a few rules that can make it useful –
- When it’s done as a portfolio: If the investor can create a portfolio of three or four commercial properties and can put them on a triple net lease, the investor gets a lot of benefits. Firstly, the investor doesn’t need to worry about maintenance, taxes, and insurance. Everything is taken care of. And at the same time, the investor receives a good return on her investment.
- When it’s done for quite a long time: Since the lease amount is less in this net lease, unless it’s done for at least 10 to 15 years, it won’t be beneficial. Going for this lease helps the investor get a reasonable return for a very long time without any worry or anxiety.
- Built-in rent escalation: Though it’s obvious in any lease agreement, still the investor needs to make sure that the built-in rent escalation clause is included in the agreement. It means, every year, the investor would get an increment in the lease amount. As a result, there are no worries about a return, and the investor would get more return every year.
Benefits of Triple Net Lease for the Investor
There are a couple of eligibility criteria that the investor has to have to use a triple net lease for leasing their properties. The first point is the investor should have a net worth of $1 million that too, without including the primary residence she owns. Or else, The investor should have an income of $200,000 or $300,000 if you are applying as a joint filer. The second point is, let’s say that you are a small investor and you don’t have the prescribed income or the net worth, can you not go for a triple net lease? The answer is yes, but it is subject to a criterion. To participate in this net lease, the smaller investors should invest in real estate investment trustsInvestment TrustsAn investment trust is a publicly traded financial institution that operates as a closed-end fund (CEF) and invests in shares or financial assets on behalf of its investors or other organizations. The value of the amount of money invested in an investment trust is dependent by the demand and supply for the invested share or financial asset, as well as the underlying value of the assets owned. (REITs) that concentrate on the similar properties in the portfolio of the investor.
What Benefits the Lessee Would get?
The bigger question is why a lessee would agree to such a lease that offers the lessor so many benefits. Does the lessee not want the benefit from the lease too? The answer is yes, and the lessee also gets the advantage in triple net lease. Since the lessor doesn’t need to pay for insurance, taxes, and maintenance, the lessee doesn’t need to pay to do much rent for the properties she takes. As a result, the lessee can save a lot of money on rent by agreeing to go for such a lease. However, this is the only benefit a lessee gets from this lease. This can often be in hidden form. You should talk to your attorney before going for any lease so that you don’t get stuck in such a lease. If you have any term like “turnkey” in your lease agreement, the chances are that agreement is triple net.
As a lessee, the expenses may exceed the benefit you receive. So be aware before you sign up for a 10-15 year triple net lease.
A triple net lease is beneficial, but it’s vital in which side you’re in.
If you’re acting as a lessorLessorA lessor is an individual who legally owns the asset granted on a lease (rented for a long tenure) to the lessee who pays a single lump sum amount or regular payments for using that asset. and going for this net lease, then it would be beneficial for you. But if you’re accepting it as a lessee, then it’s better to avoid because the benefits you would get is lower compared to the payment you need to pay. You may think that you are only paying three kinds of payments and a small amount of rent, but realize that at the end of every year, the rent would increase as per the market rate and as a result, you would need to pay more money for the next 10-15 years for the properties you rent. As a lessee, you better avoid triple net lease and go for a normal lease. Take the help of a reputed attorney whenever you go to sign the lease agreement.
Triple Net Lease Video
This has been a guide to Triple Net Lease. Here we discuss its definition along with the types of net lease. We also discussed its benefits for the investors. You can learn more about accounting from the following articles –