Basically, a triple net lease is a special type of lease available for commercial properties. When you are involved in a triple net lease, the person who leases the property will be the one who will keep the property, pay the taxes, and pay for the insurance, as well as the rent on the property. This special type of lease can vary in length, but several of them last 50 years or even longer. While many investors like to opt for a triple net lease, it is important to note that there can be tradeoffs for both parties involved in a triple net lease. Therefore, it is important that you take the time to do careful research before making your final decision.

Great reasons to choose a triple net lease

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

– Exemption 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 required 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 doing repairs, paying taxes, or even buying insurance, you can simply go back and let the tenant do all the work for you.

– Income assured: Another great reason to choose a triple net lease is that you have income assured. Most of these leases last for a long time, so you know that you will earn good income from the property for years to come without having to invest money in the property.

– Pride of Ownership: When you opt for a triple net lease, you also have the benefit of pride of ownership. Take a look at the property and how it has been developed and you can smile to yourself knowing that you are the owner of that property.

– Inheritance to heirs: Even after you are dead and missing, when you have a triple net lease property, you can pass it on to your heirs. You will leave them with something that will continue to make money for them, even after you are gone.

– 1031 Exchange: When it comes to these types 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 having to pay taxes on what you earn from the sale of the property. This allows you to preserve your capital.

Common types of net leases

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

– Bond lease: A bond lease is basically a lease in which the tenant will be solely responsible for all maintenance, running costs, replacements and repairs and there are no limitations on this.

– NNN lease – An NNN lease is very similar to a bond lease; however, in the final months of the lease, capital expenditures are somewhat limited. The tenant remains responsible for arranging and operating the property.

– NN lease: when you participate in an NN lease, the same rules are followed as an NNN lease; however, the property owner has to pay for structural expenses, such as wall, foundation, and roof care.

– Modified Net Lease – A modified net lease, also known as a modified gross lease, is where the tenant is responsible for paying for insurance, repairs, and necessary maintenance on the interior and its utilities. The owner who owns the property is responsible for all other expenses, including property taxes.

Leasing nuances to evaluate

When writing a triple net lease, it is important that several nuances are considered. The rent could be affected by things like a tax increase or even inflation, which will also affect the lease. This definitely needs to be taken into account when writing a lease, especially if it is going to be for a very long period of time. Additionally, other nuances to assess include the potential tenant’s creditworthiness and the type of business they are involved in.

Set your lease prices

When it comes to setting your triple net lease prices, there are many things you will need to consider. First of all, you will definitely need to consider the tenant’s credit rating when evaluating a tenant. The higher the credit rating, the lower the risk to the tenant. The lower the credit rating, the greater the risk that the tenant will not be able to meet the lease payments for a long period of time. Landlords use capitalization rates to price the lease, based on the risk factor of the tenant. The higher the risk that a tenant is not creditworthy on the overhead of the lease, the higher the capitalization rate should be. While tenants with high credit ratings actually start with prices at the 6% capitalization rate, those with lower credit ratings may be priced at about 8.5% -9% of the capitalization rate. In addition, the prices will depend on the duration of the lease. The shorter the lease, the higher your prices should be.

Bottom line

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