16:25 16 May 2017
Investing in commercial property is an increasingly popular investment strategy. Commercial property investment is more lucrative than residential property, as rental yields are higher and management costs negligible. One of the main reasons why landlords are choosing to invest in strip malls, condominium developments, office blocks, and industrial units is because of ‘Triple Net Leases’.
Triple net property investments offer investors a number of key benefits and triple net leases are very common in commercial real estate. A triple net lease, also known as an ‘nnn’ lease, is a special type of commercial lease agreement.
Property expenses fall into three categories: maintenance, insurance, and taxes.
In a standard lease for a residential property, the landlord (‘lessor’) is responsible for all three categories of expenses. All the tenant (‘lessee’) needs to worry about is paying the rent and insuring their personal contents. In the real estate world, this type of lease is known as a ‘gross lease’. The landlord pays for everything.
Net leases are different to standard property leases. A triple net lease places the burden for covering taxes, insurance, and property maintenance at the feet of the tenant, or lessee.
Triple net leases are actually very common and most tenants renting out a large commercial building will expect to sign a triple net lease. It may sound unfair to expect the tenant to cover all of the building’s costs, as well as pay the rent each month, but in fact, there are benefits for both parties.
Landlords love triple net leases because it reduces their expenditure. They do not have to worry about the hassle of routine maintenance costs, which can be considerable in older buildings, and they can forget about taxes and insurance premiums.
Income is fixed, which means cash flow is predictable. Most triple net leases are long-term agreements, as commercial tenants prefer the security of signing a ten-year lease. Both parties can include break clauses and rent adjustments, so long-term does not have to mean inflexible.
Triple net leases tick a number of boxes for tenants, too. The rental costs on commercial units are often lower if a tenant accepts a triple net lease, as cost savings to the landlord are passed on to the tenant.
Because a commercial tenant is responsible for building maintenance, he is able to shop around for good deals and is free to make improvements to the building as he sees fit. This allows the tenant to brand the premises according to his needs, which for a retail client is essential.
Large companies like Starbucks prefer triple net leases, as it gives them the freedom to manage their own costs, but smaller business tenants may prefer a single net or double net lease.
Commercial net leases offer a number of benefits to both landlords and tenants. They are flexible and cost effective, but always take professional advice before negotiating any type of commercial property lease.
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