Commercial Real Estate – The Triple Net Lease



Some commercial real estate investors assume that most tenants are opposed to triple net lease arrangements but that’s not necessarily true. While triple net leases do shift almost all maintenance, repair, insurance, property taxes, and other costs from real estate investors to the tenants, it also lowers the rent the tenant pays.

Triple net leases are most commonly found in single-tenant industrial and retail properties. Commercial real estate investors using triple net leases do receive less rent in exchange for passing almost all costs on to the tenants. These work particularly well for long-term 30-year leases. It’s a great deal for investors wanting to sit back and let the rent checks roll in for 30 years without doing much of anything.

New Vacant Retail Building & Parking Spaces.

New Vacant Retail Building & Parking Spaces.

Newer Buildings Typically Go Triple Net

There are many details investors need to be aware of. One is that triple net tenants prefer newer buildings. It’s not difficult to understand why. Since the tenants are responsible for everything from the roof to the plumbing to the electrical, they prefer leasing new buildings with no or few problems. Frequently real estate investors build them to the tenants’ specifications.

One of the biggest benefits coming from triple net leases is the property owner has no management responsibilities. While commercial investing is broadly known to have fewer people and toilet problems, the triple net lease eliminates all of them.

Triple Net Leases Are Not Without Risk

The single biggest risk for commercial real estate investor using the triple net lease is the tenant defaults. They are in a long-term lease and if the business fails, real estate investors have little recourse when the tenant stops paying. As a result, the rent charged in triple net leases relies heavily on the credit rating of the tenant. Some of the biggest companies in the country use triple net leases. These include Wal-Mart, Walgreens, and Home Depot.

These big companies use triple net leases as a way to expand fast. Essentially, commercial investors are extending their capital to the tenant. The tenant doesn’t need to borrow money or use their profits to purchase and build the stores they operate. Commercial real estate investors make the purchase using their capital or by taking out loans.

Obviously, these companies have very high credit ratings and are able to demand low rents when they assume all costs associated with the properties. As credit ratings decline, rents go up but that does not always favor commercial real estate investors. Because these are long-term leases and the properties are designed specifically for a single tenant, real estate investors must be sure tenants will occupy the property for the entire lease.

This means real estate investors perform a more thorough due diligence on triple net tenants. Criteria real estate investors commonly use includes the number of stores, debt to equity ratios, operating margins, and stability of management. All things being equal, the industry sector can be of particular importance to commercial real estate investors. Drug stores like Walgreens are likely to thrive for years, as baby boomers require more medicines. However, internet delivery of movies and video games threatens the very existence of companies like Hollywood Video.

BioAuthor bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.

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