Commercial net leases work differently than residential leases. In residential leases, landlords must pay all ownership expenses and maintenance costs. On the other hand, tenants are responsible for paying only a fixed monthly rent, covering all the costs of using the property. Residential leases also provide that the renter must keep the premises tidy and in the same condition as when the tenant first moved in.
A commercial lease is an agreement to rent a building, land, vehicles, or other property for business operations. Most of the time, landlords assign their responsibilities to tenants of paying bills. Every expense is negotiable between landlords and tenants in commercial leasing. According to a commercial lease, a tenant is responsible for keeping the premises in good condition and repairing them if anything goes wrong.
A net lease is an agreement in which the tenant agrees to pay a predetermined rent plus any property-related expenses. Property taxes, insurance, maintenance, and repairs are all additional costs. However, whether they sign a single, double, or triple net lease agreement will determine their costs.
SINGLE NET LEASE
A single net lease or Net or N lease is a type of lease in which a tenant is responsible for paying property taxes in addition to property rent. The base rent is generally lower to compensate for that additional expenses. Single-net leases are less popular than other types of commercial real estate leases. To ensure that all tax payments are paid on time, landlords frequently choose to collect bills from tenants and pay the government directly if tenants fail to do so. Otherwise, the government may claim the property, posing a dilemma for the landlord.
Commercial Lease vs Residential Lease
DOUBLE NET LEASES
Double net leases, also known as net-net or NN leases, are leases in which the tenant is responsible for both property taxes and insurance payments in addition to the basic rent. In commercial leases, double net leases are standard. As a result, the monthly rent is reduced by the landlord.
The landlord can shift even more risk to the renter with double net leases. Tenants are responsible for paying any property tax bills or insurance rate increases. Landlords continue receiving their monthly base rent, which is a stable source of income.
Depending on their work, tenants can rent a section or a whole floor. Even a tenant’s per square footage differs from that of other tenants. As a result, landlords charge taxes based on each tenant’s square footage. For example, in a 20000 square foot building, tenant A rents 10,000 square feet, and tenant B rents 8000 square feet. Renter A would cover half of the costs, while tenant B would cover the other half. The tenant pays these charges to the landlord, who pays the real property tax and insurance payments.
TRIPLE NET LEASES
Triple net leases, also known as net-net-net or NNN leases, are leases in which a tenant is responsible for paying property taxes, insurance premiums, maintenance, and repairs in addition to the basic rent. Landlord completely shifts their responsibilities to tenants, making it even riskier. This is a big deal because maintenance and repair bills could include things like replacing a furnace, air conditioner, or water heater, among other things. Tenants will pay a lower base amount because of the increased costs, which can be negotiated.
Triple net leases are typically used for long-term leases of more than ten years and usually include rent increase concessions.
Because tenants have complete responsibility for the property in triple net leases, it can be appropriately customized, for example, in the case of restaurants, departmental stores, shopping malls, etc. Of course, with the landlord’s permission.
BONDABLE NET LEASES
A bondable net lease is a type of Triple net lease, or an agreement between landlords and tenants, in which tenants are responsible for all the operating expenses and all three expenses in the NNN lease. Landlords have nothing to worry about paying medical office property expenses, maintenance & repairs, and even 2 AM calls of tenants regarding repairs. Another benefit of a bondable lease is that tenants cannot terminate this agreement, nor do they get any rent concessions. Simply put, it locks the tenant in for the entire lease term.
ADVANTAGES OF TRIPLE NET LEASES
The following are the benefits of a triple net lease:
1) Low-Risk Investment for Landlords
Tenants cover all risks in triple net leases, including regular property upkeep and other operating costs. As a result, for landlords, it is a low-risk investment.
2) Business Impact in The Long Run
As I previously stated, triple net leases are for the long term, and as a result, the business impact is significant compared to short-term business. Tenants staying in the same area for more than 10-20 years can establish their firm, which is advantageous to any company.
3) Tax Benefits
Because tenants under a triple net lease are responsible for paying property taxes, they may be able to deduct these costs from their operating expenses, resulting in tax savings.
4) Less Responsibility of Landlords
As almost all of the responsibilities shifts from landlords to tenants, landlords have less responsibility to take care of. We all know how hard it is to maintain properties as a landlord. Landlords are only required to see if the bills are paid on time or not.
5) A Reliable Source of Income
A triple-net lease can offer an investor a reliable income source. This lease is set up; you pay the same monthly amount for an extended period.
6) Better Transparency
In triple net leases, tenants have better transparency regarding bills, as they pay all the expenses every month instead of writing checks to landlords. Therefore this helps in knowing the exact amount tenants are paying.
DISADVANTAGES OF TRIPLE NET LEASES
The following are the disadvantages of triple net leases:
- If property values in the area rise, landlords bound to a long-term lease lose their option to raise the rent. This can limit earning potential in the long run.
- Tenants must keep a property in working condition by repairing it when necessary during the lease period. So, what happens when a tenant’s roof begins to leak, and the lease is only six months old? Or, for that matter, if the renter cannot make the repairs due to a lack of business? They may ignore it, allowing the problem to worsen until the landlord notices it, which will cost much more to fix. Tenants also have little incentive to perform preventative maintenance, which can save a lot of money in the long run; in summary, tenants rarely look after the property and the owner.
- Even if renters repair items, it is in their best interests to utilize low-cost, low-quality products that will not last in the long run. Landlords must keep an eye on tenants.
At last, landlords must research local markets before entering into triple net lease investment. It’s best to observe how similar properties perform and how they set a base rent. Although tenants have all the responsibilities regarding expenses paid on time, it’s the landlords’ responsibility to keep an eye on the property and see if the bills are going on time.
