The Basics of NNN Lease Explained by Edward Wang
In this video, our commercial real estate agent Edward Wang will discuss the basics on a Triple Net Lease or sometimes simple referred to as a NNN Lease. To begin, hit the play button and you may follow along to the transcription.
Okay, so now we’re going to talk about triple-net lease properties. And why we’re talking about them is, out of all the categories of real estate out there if you’re in the right property with the right tenant, it’s your lowest risk bet in this environment in any environment actually. And so for this, I’m going to have Edward Wang, he’s kind of my right-hand man. And he’s actually our in-house expert in triple-net lease properties, he’s done quite a few of them and done a lot of work in learning how to analyze them, et cetera. So I am going to turn this part over to Edward.
Thank you, Rusty. So what is a triple-net lease property? Rusty just mentioned a variety of different types of commercial property. And within each of these types of properties, the tenant is required to sign a lease with the landlord.
So triple-net lease has often been regarded as one of the most conservative and safest way of investing in commercial real estate. And so we’re going to define what a triple-net lease is today. Triple net lease in short can be defined as net of property taxes, net of building insurance or any property insurance attached to the building, and finally, net of maintenance. In addition to the tenant paying their typical rent payments and utilities.
And so in short, while you might be sacrificing some cap rate percentage points on your investment you will get more of a stable and long-term return by investing in a triple-net lease building because the tenant’s going to be taking care of your typical day to day expenses. Now, why are we doing triple net lease buildings? Well, there’s a variety of reasons.
First and foremost the tenant is required to pay your expenses. So as we mentioned earlier instead of getting a tax bill every year or getting insurance bills or maintenance payments that are coming directly out of your own pocket the tenant will take care of it. You just send them your property tax bill and the tenant is legally bound to pay the property taxes, the insurance payments, and all of their maintenance expenses as well.
I’m a second-generation property owner. And my parents bought apartment buildings starting from the early eighties. And I can’t tell you enough countless stories of tenants calling in the middle of the night having some issues with their maintenance with their plumbing or with laundry machines not working.
And so, as multifamily owners, which I know a lot of you guys are, forget dealing with these calls… these late-night maintenance calls, and having to service your tenants. In a triple net lease, the tenant will take care of all of their own expenses.
Second, triple net leases tend to be steady income and lower risk. Due to the fact that these tenants are often national tenants or regional tenants and have some sort of credit rating their business can easily afford to pay the rents. You don’t have to deal with lower quality tenants or evicting these types of tenants necessarily as much per se. And in a triple net lease, these tenants often sign 10 to 20-year terms, which we like because of the fact that you don’t have to again, deal with vacancy rates as often or having to vet different types of tenants and sign new leases every one to three years.
Because the tenants are taking care of their own maintenance expenses it’s also relatively no maintenance and little management responsibility. And we like high-quality credit tenants, tenants that are established or have multiple locations versus tenants that only have one or two locations.
This doesn’t only show that they have better credit but they can afford to pay their rents much easier. And also one common question is how do we deal with inflation as time progresses with these commercial tenants? Well, the good news is that most commercial triple net lease properties have built-in rent escalations so that it can address inflation, and also you can build equity this way if you hold it over a period of time.