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The Risk and Reward of Triple Net Leases

A common lease type that is well-known for being a favorable option for landlords is the triple net lease (NNN), which is widely referred to as having “minimal landlord responsibilities”. Popular among investors, triple net lease properties often attract national tenants like restaurant or retail chains. Although there are many facets of the triple net lease that make it an attractive option for both the landlord and tenant, there are also some potential risks.

In addition to base rent, NNN leases mean the tenant is responsible for three additional “nets”: common area maintenance (i.e., building maintenance also referred to as CAM), property insurance, and property taxes. In most NNN leases, the landlord is still responsible for roof and structure. In an Absolute Net lease, the tenant is responsible for everything and there are zero landlord responsibilities. Triple net leases tend to be longer in lease term with multiple options to extend the lease. The multiple extensions provide a security net for both landlord and tenant.

Because landlords can pass-through the triple net expenses to their tenants, they gain a steady stream of income without the worry of unexpected expenses like maintenance emergencies, building repairs or tax increases. If you’re considering purchasing a NNN investment property, make sure the lease includes a clause that allows you as the landlord to regularly inspect the property to ensure it is being properly maintained. The triple net lease has earned the title of being responsibility-free for the landlord because it doesn’t require day-to-day management, but it’s still a good idea to keep an eye on the investment to ensure the property is maintained to standard.

With all the benefits I’ve mentioned, it’s hard to see a downside to the triple net lease, right? As can be expected, with great reward comes the possibility of risk and this scenario is no different. Many triple net leased properties are single tenant, which means the property is either fully occupied or completely vacant. As the end of the lease term approaches, I encourage investors to work with their real estate advisor to negotiate a favorable extension of the lease term.

If the tenant of a triple net leased property does choose to move out at the end of their term, the landlord could encounter problems when trying to fill the space if the configuration was tailored to a specific use, like a quick-service restaurant with a drive-thru. This limits the pool of potential new tenants and could result in a long-term vacancy of the property.

While I always make sure my clients are well-informed of potential risks with an investment, in the case of triple net lease properties I believe the benefits far outweigh the risk. I work closely with my clients to ensure that any prospective tenants are properly vetted and that the lease agreement is structured to safeguard against any potential pitfalls. There are several triple net lease investment opportunities available right now – reach out to my team for more information!

Justin Langlois, CCIM is a Commercial Real Estate Investment Advisor with Stirling Properties servicing Baton Rouge, Louisiana and surrounding markets. Please reach out to Justin to discuss your real estate investment strategies.

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