New real estate investors need to be aware of so many concepts. Real estate has its own vocabulary and so many different laws and regulations to keep track of. When investing in commercial properties, it is important to know the different types of leases to utilize and the benefits of each. In commercial real estate, there are gross leases and net leases, let’s just focus on net leases for now.

 A net lease is where a tenant pays one or more additional expenses in addition to monthly base rent payment. Rents tend to be lower with net leases than traditional leases since there are more additional expenses a tenant has to cover.

There are four types of net leases which are:

• Absolute net lease: The responsibility to pay for all payments related to the property, including repairs, falls on the tenant.
• Single net lease: The tenant pays a lower base rent plus property taxes.
• Double net leases: The tenant is responsible for base rent plus property taxes and insurance premiums. 
• Triple net lease: Tenant covers base rent plus includes property taxes, insurance, and maintenance costs. In this type of lease, the tenant’s creditworthiness partially determines the lease amount. Triple net leases are the most commonly used type of commercial lease since they tend to benefit both the tenant and the landlord. 

Triple net leases are most frequently used on freestanding retail properties like convenience stores and warehouses or single-tenant properties like medical offices or industrial properties. Property owners prefer to enter into triple net leases for multiple reasons.

Some of the most significant benefits to a triple net lease are:

Long-Term Occupancy

Most triple net lease agreements are created to be used in long-term tenant situations, which are typically greater than twenty years. This is ideal since you can be confident that you will be bringing in money for that time period. Since the costs involved with finding new tenants and negotiating leases can become high, having a long-term tenant is a huge benefit for investors. Otherwise, you would be looking at having the property turnover every 3-5 years. 

Low-Risk Investment

In a triple net lease, your tenant is responsible for just about all the costs associated with the property, like taxes and insurance, and other general upkeep expenses. Plus, the majority of unknown or catastrophic property expenses will also be passed on to the tenant, which makes a triple net lease agreement a relatively low-risk investment for an investor.

Consistent Income Stream

Since this type of lease is structured to include a consistent amount of rent each month over an extended period, a triple net lease will provide a consistent income source for you as the investor.  

Reduced Landlord Duties

With a triple net lease, you will not have nearly as many responsibilities compared with more conventional leases. This will give you more time to focus on other responsibilities or just allow you to relax and collect money. 

Costs May Be Split

Triple net leases provide  some benefits for the tenant too. In a commercial property which can house multiple tenants and has a low vacancy rate, triple net leases are beneficial since the taxes, insurance, and maintenance costs are divided by more tenants making the payment amount smaller. Spreading those expenses out among more lessees means each tenant will pay a smaller amount of the costs while still having a lower monthly base rent. 

As with anything in life and business, there is also a downside to entering into a triple net lease. Here are some situations you may want to consider when putting this type of lease agreement together:

Earning Caps

Entering into a long-term lease does not allow for a landlord’s ability to increase the rent if property values in the area increase. This can limit earning potential, especially if your property is located in an area which sees substantial growth. Without going into too much detail, you are able to negotiate a rent escalation into the lease agreement, but even still, you cannot predict the future, and there is no way to know how much values will increase over the course of a couple decades. 

Assuming Property Expenses 

With a triple net lease, the tenant takes on the responsibility for the operations and upkeep of the building space they are renting. This means that tenants must be prepared to finance the building operations and any unexpected expenses related to it plus any of their regular business expenses. This could cause a potential tenant to shy away from your property and look for a different type of lease option in a different building or location. 

Tax Liabilities

The tenant becomes responsible for property taxes, which means they are also responsible for all the associated liabilities. This includes fines and penalties for late or incorrect tax remittance. However, should the tenant fail to pay taxes, you as the property owner would be held liable and would have to come up with the money. 

Vacancy Risks and Rollover Costs

With any investment property, there is always the risk that a tenant may default. Prior to entering into any lease, especially one that lasts for decades, tenants have to be thoroughly vetted. Even still, there are so many reasons a tenant may not be able to cover their monthly rent. 

Look at 2020, who could have predicted the impact it had on business large and small? Defaults in rent have increased significantly in the past year which makes landlords scramble to figure out how to cover their expenses. 

For both tenants and landlords, triple net leases can offer some benefits. For the landlord, triple net leases have proven to be a reliable source of income with very few overhead costs. The landlord also does not have to play as much of an active role in the management of the property, which makes your life much easier. If you are a commercial property owner looking for a way to reduce risk and get as close to guaranteeing long term income, a triple net lease is the way to go. At the end of the day, being a commercial property owner is your business and all businesses carry some risk.  You will need to look at the big picture and calculate your expenses versus desired income to determine whether or not a triple net lease is a good strategy.