If you’re a landlord, you must be wondering what would be your best option when it comes to leases in order to optimize returns. It should have the least hassles when it comes to expenses and long-term steady flow of income. Is there a lease that would fit your bill perfectly? Of course, it’s called the triple net lease.
Before we get into the reasons why this is the best option, let’s find out the other options for leases and why triple net leases score over them. So let’s begin with the broad categories of leases.
There are two main categories of leases when it comes to real estate are gross leases and net leases. The difference between the two comes from the expenses that the tenants has to pay.
In case of gross leases, the financial obligation is restricted to the mutually agreed rental based on a fair market price. The tenant might have to pay for a few utilities.
Gross leases are applicable for residential lease agreements with tenants, and this is what most Americans understand when it comes to leases. Self-storage units and hotel rooms come under this category.
The financial obligation is greater when it comes to net leases. Not only does the tenant have to pay the rental mutually decided with the landlord, but they are expected to pay for insurance, utilities, taxes, and other expenses. There are 4 types of net leases.
The categories of net leases differ in terms of financial obligations. Here are the different net leases:
The financial obligation is the greatest when it comes to an absolute net lease. It covers every possible expense, barring potential major repairs. If it is an old building that experiences structural problems, the tenant is supposed to foot the bill.
The financial obligation is the least when it comes to a single net lease. All the tenant has to pay is the rent, property taxes and utilities.
Apart from the financial obligations of a single net lease tenant, a double net lease tenant is also responsible for the insurance of the building.
In case of a triple net lease, apart from the obligations of double net lease tenants, they are expected to pay for a major portion of the common area and structural maintenance expenses.
Due to its popularity, the terms ‘triple net lease’ and ‘net lease’ are used interchangeably.
While it’s hard to find absolute leases or single net leases, you will find double net leases in properties that have multiple tenants and triple net leases in properties with single tenants.
To ensure there is no default in payment of expenses, landlords prefer making the payments.
Triple net leases are used for single tenant or freestanding properties because dividing the maintenance and insurance obligations among multiple tenants would be a complex issue. You can find them in medical offices and industrial properties.
The reasons why triple net leases are preferred are:
What sets triple net leases apart from the other types of leases is the tenure of these leases. The average duration of these leases is 10 years, with options for an extension by the tenant.
Triple net leases have inbuilt increases in rent that are reasonably low. These inbuilt increases are known as ‘escalators.
The variable costs related to the building is transferred from the landlord to the tenant. If the property taxes go up, you don’t need to worry about it, the tenant will take care of it, and your cash flows won’t be impacted.
Since triple net leases are long-term leases, you won’t face any problems with re-leasing and vacancy. Not only will you have steady cash flow, but there will be built-in rent escalators that provide an increase at regular intervals.
While the risk is minimized for the landlord, the triple net lease is not completely risk-free. Maintenance is the responsibility of the landlord, and you need to get it done regularly to ensure that your investment is protected. Tenants stay out of expenses relating to routine maintenance.
Triple net leases are cheaper compared to gross leases and are beneficial for the tenant as well. The reason this is financially viable for the landlord is the duration of the lease with the recurring costs like taxes, insurance, and maintenance paid by the tenant. The tenant gains even after paying for the additional costs in the lease.
When compared to other leases, not only is the initial rental on the lower side, the escalation too in triple net leases is much lesser compared to the annual growth in commercial market rental rates.
While the annual commercial rental rates grow by 3 to 4%, the rent escalators in triple net leases grow by just 1 to 2%. This makes the cost structure favorable for the tenants, and they can create a budget for the amount they have to pay for the annual rental.
The low cost is attractive for freestanding retail properties such as warehouses, clubs, or convenience stores.
A triple net lease is beneficial for both landlords and tenants. These leases provide long-term income security for the landlord along with gradual escalation in rental factored in, and they can pass on the benefits to the tenant. The tenant can prepare long-term budgets for rentals, and lower rental means higher profits for them.
If you’re a landlord, enter a triple net lease and enjoy a long-term steady cash flow!
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