NNN leases are one of the highest sought after properties for a 1031 Exchange. If you are an investor planning to sell your property and reinvest the gains into a like-kind replacement property to defer capital gains, the most prominent options available for you are NNN and DSTs.
Today we are going to discuss crucial benefits and a few shortcomings of NNN properties which you should certainly be aware of before investing or opting for a 1031 Exchange.
What is a Triple Net (NNN) Lease?
A triple net (NNN) lease shifts the management responsibilities of property on to the tenants along with the cost of the rent. The tenants not only pay the rent but also bear the responsibilities of property maintenance and expense.
Triple net, meaning “net-net-net,” is often abbreviated as just “NNN.”
Each “net,” or “N,” depicts one operating expense category that the tenant is liable for apart from their rent.
Operating expenses on commercial properties generally fall into three broad categories:
A tenant can choose either one of these expenses or all the three.
- Those leases in which the tenant decides to take on one expense are referred to as Single net leases.
- Similarly, aDouble net lease is one in which the tenant agrees to take on two of the above expenses.
- And, finally, a Triple Net Lease is one in which the tenant agrees to take the entire management responsibilities for a property.
This is preferred both by the tenant and the landlord. Tenants enjoy the control they have and landlords enjoy the experience of hassle-free management.
Let’s understand NNN is more details –
Triple Net Lease Pros and Cons
The reason behind the growing popularity of NNN leases is that – not only does it protect owners from incurring any inconsistent or unexpected costs over time but it also creates a more steady revenue stream.
In case you are wondering – why would tenants acquire more responsibility, here’s the reason –
- From a tenant standpoint, NNN leases allow tenants complete control of the property without owning it.
For example, let’s consider a Target or Dunkin’ Donuts franchise…
These corporate giants are known to maintain consistency in their style and appeal which provides every store a friendly vibe and encourages shoppers to shop or visit more often. If a Target Supermarket has to consult a landlord before making any basic change, it would certainly go out of business, and so will a Dunkin’ Donut. Therefore such corporations prefer an NNN lease so that they have more control and ease of doing business.
Triple net tenants control the property they live in. This gives them a sense of relief as they do not need to depend on landlords for every simple issue or repair.
Another appealing advantage of a triple net lease is lower rent. As tenants bear most of the property maintenance responsibilities, they are charged lower than market rent.
Ask any landlord – what they hate the most, and all of them would give you the same answer – Property Maintenance. Who doesn’t enjoy a passive revenue stream with absolutely no responsibility! Landlords who own a single-tenant property with an NNN lease can enjoy the luxury of minimal management.
Stable Revenue Stream
Most of the tenants who opt for Triple Net leases have excellent credit ratings. Also, the duration of such leases is at least a minimum of 10 years. This ensures that there is a stable cash flow and landlords do not have to worry about finding promising tenants every year.
Single-tenant properties start as low as $500,000. Such a low threshold allows even small scale investors revenue to buy an affordable property and start earning fairly quickly.
The cons are straightforward.
- Not every tenant enjoys taking more management responsibilities.
- Also, instead of paying only monthly rent, tenants can be hit with unexpected property maintenance costs every now and then – such as weather damages and other repairs. Not every tenant prefers total control of a property.
What commercial property types will use NNN leases?
Ideally, freestanding commercial buildings or retail properties are most suitable for triple net leases.
- Industrial Parks
- Shopping Malls
- Office Buildings
- Bank Buildings
Find NNN Properties for Sale
If you are looking for a NNN lease property, we have a list of premium off-market properties, ready to take on tenants. In case you are already within your 45-day property identification period, we have many properties that can close within a maximum of 3 days. Click here to obtain a free property list.