The Good, Bad, and Ugly of Triple Net Leases

Owning commercial property can be a smart investment, but it also comes with its fair share of responsibilities. One way to manage these responsibilities is through a triple net lease, which many inside the industry say is the best way to be profitable and also place the burden of responsibility and upkeep on the tenants.

But it’s not as simple as you might think. As with any strategy in real estate, there are still plenty of risks and challenges. Your success with triple net leases is highly dependent on how you approach it and which rules, boundaries, and processes you put in place.

What is a Triple Net Lease?

First off, let’s talk about what a triple net lease is. In simple terms, it’s a type of lease agreement used primarily for commercial properties.

Under normal circumstances, when you rent out a property, you, as the owner, are responsible for certain costs like property taxes, building insurance, and maintenance expenses. However, in a triple net lease, these costs are passed on to the tenant.

This means the tenant pays not only the rent but also the property’s taxes, insurance, and maintenance costs. This lease is called “triple” net because it includes three types of costs: taxes, insurance, and maintenance.

Why Do Property Owners Use Triple Net Leases?

As you might guess, based on the description above, many commercial property owners like triple net leases. Here are a few specific reasons why:

Steady Income: Since the tenant covers most of the variable costs, your income from the property is more predictable. You don’t have to worry about unexpected maintenance or tax increases eating into your profits. Almost all of the income you generate in lease payments can be stashed away as profit rather than dishing it out to cover bills and repairs.

Less Management Required: With the tenant handling a lot of the responsibilities, you have fewer day-to-day tasks. This can be a big relief, especially if you own multiple properties or have other business ventures. You also don’t get as many late-night phone calls or frantic requests for you to fix something. Because it’s the tenant’s responsibility, they have to schedule, coordinate, and pay for repairs on their own.

Long-Term Tenants: A standard lease might operate on a 12-month basis. But triple net leases often come with longer terms – potentially up to three to five years at a time – meaning you have a stable tenant for several years. This reduces the time and money spent on finding new tenants. It also allows you to forecast your income and ROI on a property much better than if you’re operating on short lease terms.

The Risks of Triple Net Leases

While triple net leases might sound perfect, they also come with risks that you, as the property owner, must be aware of when entering into this type of agreement with a tenant. Here are a few.

Tenant Reliability: You depend on your tenant to handle significant responsibilities. If they neglect maintenance, for example, it can lead to big problems. Unlike with other types of lease agreements, you might not be as likely to keep a big emergency fund or set aside money to cover taxes, insurance, or maintenance. This can leave you in a compromising situation, should something happen.

Market Changes: If the local market weakens, you might have to accept lower rent to keep or attract tenants, impacting your profits.

Property Overlook: Since tenants are responsible for maintenance, they might not care for the property as well as you would. Over time, this could lead to the property becoming run-down, affecting its value.

Complex Agreements: These leases are more complex than standard leases. Both parties need to clearly understand their obligations to avoid disputes. Otherwise, you could end up in an expensive legal battle.

5 Reasons to Work With a Property Management Company if Using Triple Net Leases

Given the complexities and risks of triple net leases, working with a commercial property management company can be a wise choice. Here’s why:

Expertise: These companies understand the intricacies of triple net leases. They can help draft a lease that protects your interests and ensure that all parties understand their responsibilities.
Enforcement: A property management company can monitor the tenant’s adherence to the lease terms, ensuring they fulfill their obligations for taxes, insurance, and maintenance.
Market Knowledge: They have their finger on the pulse of the local market, so they can help set competitive rent prices and find suitable tenants.
Handling Disputes: If there’s a disagreement between you and your tenant, the property management company can step in to help resolve the issue, saving you time and stress.
Property Care: They can conduct regular inspections to ensure the property is being well-maintained, preserving its value over the long term.

Developing a Triple Net Lease Strategy

Triple net leases can be a great tool for property owners looking for a more hands-off investment with steady income. However, they do carry certain risks, especially if tenants fail to uphold their end of the bargain.

By partnering with a commercial property management company, you can mitigate these risks. However, always remember that in the world of commercial real estate, there’s no replacement for being well-informed. Do your research and make educated choices!