The Pros and Cons of Triple-Net Leases for Tenants and Property Owners
For anyone new to the world of commercial real estate, triple-net leases are a concept worth exploring. Also referred to as “NNN” leases, triple-net leases have become very popular for property owners and tenants alike. To determine which type of lease is right for your needs, let’s take a minute to discuss what a triple-net lease is—and why they’re growing in popularity!
What is a Triple-Net Lease? Triple-Net leases are a type of rental agreement where the tenant is responsible for paying property taxes, insurance, and all maintenance fees associated with the rental property. These differ from standard commercial lease agreements where these costs are usually covered by the property owner or manager. To compensate for these additional incurred costs and responsibilities, the tenants’ rental fees are oftentimes lower than standard rental agreements.
As you might have guessed, the triple-net lease is more demanding for tenants than single-net or double-net leases. In either of these cases, the tenant would instead be responsible for one or two costs respectively (between property taxes, insurance, and maintenance items).
The Benefits of Triple-Net Leases Property owners seem particularly interested in this type agreement because of the hands-off approach that they can have with the property. Property management and maintenance is often a hassle that property owners would prefer to avoid. In triple-net lease agreements, these tasks are shifted to the tenants. Since property owners are not responsible for the ongoing upkeep of the property, they can devote their time toward other business ventures or properties that require more attention instead
For tenants, many prefer the extra control that they gain with a triple-net lease. They can select their preferred insurance carrier, and they control the maintenance and overall appearance of the property they occupy. While they do have to manage additional costs, lowered base rental fees are meant to balance these responsibilities.
The Drawbacks of Triple-Net Leases While many property owners like the idea of avoiding property management, most tenants also prefer not to take on those obligations. Because of this, acquiring reliable, long-term tenants can be difficult and vacant spaces can stay empty for longer.
For tenants, while they gain a stronger sense of ownership with triple-net leases, they’re still dependent on their landlords for certain things. Property owners are still responsible for contesting new property tax appraisals. Therefore, these property owners who don’t benefit from lowered taxes may not be as incentivized to arrange a private appraisal. This attitude may be short-sighted, since when their tenants then leave, the property owners may then have to deal with unnecessarily high property taxes first-hand.
Property owners can often experience a few surprises when tenants leave a triple-net lease property. Tenants who don’t keep up good building maintenance may leave property owners with a big mess to deal with.
Every strong tenant-landlord relationship should be built on trust and understanding. With triple-net leases, this starting point is no different. Depending on your situation, triple-net leases for property owners can be a great opportunity for steady income with minimal oversight! For tenants, the added bonus of lower rental fees and greater control over their rental property may outweigh the expense of added maintenance and tax costs.