Triple Net Lease (NNN) - Explained
What is a Triple Net Lease?
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What is a Triple Net Lease (NNN)?
A triple lease is a lease agreement that appoints the tenant with the primary responsibility of all the assets within that property which is being leased. In other words, any agreement that assigns the lessee with the cost of assets (in case of damages) in addition to the rent paid on the property, is said to be a Triple Net Lease (NNN). This agreement has triple Ns because the tenant, in this case, pays the net real estate taxes on the leased property, the net building insurance, and the net common property maintenance, and this has ascribed it with the nickname: Net-Net-Net (NNN) lease.
How Does a Triple Net Lease Work?
If a tenant rents the property under the NNN agreement, he or she will take on the responsibility of paying the net real estate tax, the building insurance and the maintenance fee. The cost for any intended repair of the property due to damages will also be shouldered by the lessee, even in the case of a natural disaster. With such conditions, one might say it is absurd to sign such a deal, as the tenant still has to pay rent. The case, however, is different from what is seen in standard rent rates. Leased properties under the triple-net lease agreement incur a much lower tax rate; so low that it can be quite tempting. The lease amount is also calculated by the creditworthiness of the lessee. A net lease in commercial real estate is a lease which expects the tenant to pay part or all of the taxes and fees associated with the leased property. A single net lease only expects the tenant to cover the cost of rent and property taxes, while the double net lease adds in building insurance.
Investing in Triple Net Lease
Triple net leases are typically investments with low risks since almost all the costs associated with the property is covered from the lessees pocket. This kind f investment has turned out to be a hotcake for real estate investors that are interested in low-risk investment even when returns can be slow and small. NNN lease is generally provided as a portfolio containing more than three properties usually commercial buildings that are leased by a single entity with already existing cash flow. These investments are not typically liquid, as the duration could last for 10 to 15 years per property. However, rent increases per annum according to what is written in the agreement. Examples of commercial real estates that can be leased include office buildings, shopping malls, industrial parks, bank expansion buildings, pharmacies, or restaurant chains. Triple Net Lease (NNN) are very beneficial to investors as they are a long-term investment which provides steady income. In most cases, they can also be regarded as passive income. There is also a chance that the commercial properties can appreciate in the near future, making it an asset to owners. Also, the option of evading taxes when properties are sold is also a reason why most Investors and VCs jump into this business. This is made possible by the 1031 tax-deferred exchange. There is, however, a high barrier of entry into this investment, as interested persons are expected to command over a million dollars in net worth, excluding the value of their permanent or current residence. For investors who don't own that amount of money, or would like to put a little amount into it, they can invest in real estate investment trusts (REITs) which adds such properties to their investment portfolios.
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