Investing In Triple Net Properties – Critical Lease Components You Need To Know First By Tony Seruga, Yolanda Seruga And Yolanda Bishop At Isnare.com Ezine Articles

Basically a triple net lease is a special type of leasing agreement available for commercial property. When involved in a triple net lease, the person leasing the property will be the one to maintain the property, pay the taxes, and pay for the insurance, as well as the rent for the property. This special type of lease can vary in length, but a variety of them last 50 years or even more. While many investors like to go with a triple net lease, it is important to notice that there can be pros and cons for both parties involved in a triple net lease. So, it is important that you take the time to do careful research before you make your final decision.

Great Reasons to Choose a Triple Net Lease

If you are considering going with a triple net lease, there are definitely a variety of benefits that you can enjoy. The following are just a few of the reasons to choose a triple net lease.

- Relief from Management Obligations – One of the best reasons to choose a triple net lease is that you have no management obligations. You won’t have to worry about the time and money it takes to manage a property.

- No Landlord Responsibilities – You will also find that you have no landlord responsibilities when you are involved in a triple net lease. Instead of having to worry about making repairs, paying taxes, or even purchasing insurance, you can just set back and let the lessee do all that work for you.

- Assured Income – Another great reason to choose a triple net lease is that you are assured of income. Most of these leases last a very long time, so you know that you will be getting a good income from the property for years to come without having to put money into the property yourself.

- Pride of Ownership – When you go with a triple net lease, you also have the benefit of pride of ownership. Take a great look at the property and how it has developed and you can smile to yourself knowing that you are the one that owns that property.

- Estate for Heirs – Even after you are dead and gone, when you have a triple net lease property, you can pass that on to your heirs. You will be leaving them with something that will continue to earn money for them, even after you are gone.

- 1031 Exchange – When dealing with these kinds of leases, you can also benefit from a 1031 exchange, which is basically a tax rule that allows you to sell one property and acquire another similar property without being taxed on what you make from the sale of the property. This allows you to preserve your capital.

The Common Types of Net Leases

When it comes to net leases, there are several ways you can go. The following are different types of leases that you can choose from if you want to go with a net lease.

- Bond Lease – A Bond lease is basically a lease where the tenant will be entirely responsible for all the maintenance, expenses for operation, replacements, and repairs and there are no limitations on this.

- NNN Lease – A NNN Lease is very similar to the bond lease; however, in the final few months of the lease, the capital expenditures are somewhat limited. The lessee is still responsible for fixing and operating the property.

- NN Lease – When you are involved in a NN lease, it follows all the same rules as a NNN lease; however, the landlord of the property has to pay for structural expenses, such as taking care of the walls, foundation, and the roof.

- Modified Net Lease – A Modified Net Lease, also known as a Modified Gross Lease, is where the tenant is responsible for paying for insurance, the repairs and maintenance needed on the interior, and their utilities. The landlord owning the property is responsible for all of the other expenses, including the taxes on the property.

Lease Nuances to Evaluate

When a triple net lease is being drafted, it is important that various nuances are considered. The rent could be affected by things like a tax increase or even inflation, which will then affect the lease as well. One must definitely take this into consideration when drawing up a lease, especially if it is going to be for a very long period of time. Also, other nuances to evaluate include the credit worthiness of the prospective tenant and the type of business that they are involved in.

Setting Your Lease Prices

When it comes to setting your triple net lease prices, there are many things that you will need to take into consideration. First of all you will definitely need to consider the lessee’s credit rating when you are evaluating a tenant. The higher the credit rating, the lower risk the tenant will be. The lower the credit rating, the higher risk will be that the tenant will not be able to follow through on the lease payments for a long period of time. Owners use capitalization rates to set lease pricing, based on the risk factor of the tenant.. The higher the risk that a tenant may not be solvent over the coarse of the lease, the higher the cap rate should be. While those tenants with high credit ratings actually start out at prices in the 6% cap rate, those who have lesser credit ratings may have prices from about 8.5%-9% cap rate. Also, the prices will depend on the length of the lease. The shorter the lease, the higher your prices should be.

Bottom Line

Make sure to include provisions in your lease to cover future tax increases and inflation. Also, screen your tenants well to make sure they have a strong business for your location and are paying you lease rates in proportion to their risk factor as a long-term tenant. Owning commercial property with a triple net lease can be a great way to earn passive income on your investment, if you have done your homework well.

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