Triple net properties, or three nets (NNN), refer to commercial real estate investments where tenants pay basic rent, building insurance, property taxes, and maintenance. The structure allows landlords to take a disengaged approach to property management while giving tenants more power.
NNN leases offer more control over properties, including the right to make improvements. They also often offer stable long-term reliability, as they carry commitments that sometimes extend beyond 25 years. Tenants can also enjoy tax benefits, as their costs, such as property taxes and maintenance, qualify as tax-deductible business operating expenses. Some tenants may, on occasion, also capitalize on the depreciation related to property improvements.
Conversely, NNN leases place the full burden of property taxes, insurance, and maintenance costs on tenants, exposing them to rising costs and possible landlord exploitation. Unforeseen repairs, maintenance issues, or tax penalties can also lead to substantial out-of-pocket expenses beyond the agreed-upon base rent.
Landlords stand to benefit as much as tenants through a longer lease commitment, guaranteeing a stable income. These long-term agreements also enhance property value and attract potential investors. With tenants assuming more control over property management, landlords experience reduced administrative responsibilities, which helps them avoid staffing costs and legal fees.
Despite these advantages, landlords can face drawbacks with NNN leases. A primary concern is finding reliable and trustworthy tenants with a low risk of default. Assessing tenants' financial strength becomes crucial when signing a lease agreement. Tenants may also find the terms of an NNN lease unfavorable, leading them to seek alternative properties with more attractive lease structures or choose not to renew their existing lease. In such cases, landlords could face extended vacancies.
Regarding investment, triple net properties may suit many investors due to their minimal management requirements, allowing for geographical flexibility when considering choices. Investors in NNN properties should start by determining their preferred investment returns, avoiding subpar ones. Key factors influencing returns include property location, tenant quality, building age, and lease terms. Next, Investors should determine their target cap rate, I.e., the minimum acceptable rate of return expressed as a percentage. The cap rate is achievable by dividing a property's net operating income by its buying price.
Triple net lease investments offer two primary avenues: public and private. Public investment involves purchasing shares in publicly traded real estate investment trusts (REITs) specializing in NNN properties. On the other hand, private investment entails direct property acquisition, which, although providing greater control, requires more capital and expertise to navigate the competitive real estate market.
A specialized triple net advisor can help investors identify suitable opportunities and access institutional-quality NNN assets through their established networks. Prioritizing NNN investment experience is crucial when choosing an advisor. Top advisors are experts in property evaluation, conducting due diligence, and underwriting. Investors opting for private equity firms should consider their fee structure, investment philosophy, offerings, and track record to ensure alignment.
Establishing clear criteria for acceptable tenants and lease terms is essential for successful NNN lease investments. Shorter lease terms, such as those under three years, carry increased risk and uncertainty as they introduce the possibility of vacancy upon expiration. Tenant creditworthiness is another critical factor, varying significantly based on financial stability, number of locations, and business model. For example, a small, regional business presents a higher risk than a national corporation with multiple locations.
Moreover, investors should favor triple net leases backed by corporate guarantees, as they offer stronger security than those supported by individual franchisees with limited financial resources.
