When an investor is evaluating a NNN Lease Investment opportunity, the most important and critical aspect is the careful review of the NNN lease contract. Certainly, not all lease contracts are created equal and some of them involve more responsibility for the investor than others. Let’s review 5 of the most common NNN Lease Types and their major characteristics.
NNN Lease Types
Single Net Lease – A Single Net List require the highest level of investor involvement and responsibility . The tenant is responsible to pay, in addition to the base rent, the property taxes as well. All other property expenses such as insurance, maintenance costs, among others, are still the responsibility of the Landlord.
Double Net NN Lease – A double net (NN) lease makes the tenant responsible for the payment of property taxes and insurance. The landlord retains the responsibility of maintaining and repairing (if applicable) both the structure and the roof, in addition to the common maintenance areas (CAM).
Triple Net NNN Lease – In simple terms, in a Triple Net Lease the tenant is responsible for paying the three (3) N’s as follows: N– Property Taxes, N– Insurance,N– Maintenance Costs. In addition to the base rent, the tenant is also responsible for any repairs and maintenance of the property and common areas.
Absolute Triple Net NNN Lease – Structured in a bond like way, in the absolute triple net lease the tenant assumes all obligations concerning the property. In addition to the NNN items discussed above, the tenant carries also the responsibility of the roof and structure. In case of a fortuitous loss, the tenant is also responsible to restore or rebuild the property and restore it to its original condition and pay for any insurance deficiency. This type of lease is very popular among investment grade tenants who usually sell and leaseback the property. For the investor, the Absolute Triple Net NNN Lease offers the maximum level of benefits with the minimum or almost no involvement in the asset management.
Ground Lease – Ground Leases (or Land Lease) have similar characteristics of Absolute NNN Leases in terms of the tenant responsibility for paying property taxes, insurance, maintenance, roof and structure. In a ground lease the investor or landlord leases the land to the tenant who is allowed to build on the land. The tenant has leasehold interest in the building and improvements, but in most ground leases, the building and permanent fixtures become landlord property at the expiration of the lease.
As you can see, there are substantial variations among the different NNN lease types. These differences will determine the level of investor involvement and responsibility with the property and the tenant. The investor should always hire an experienced real estate attorney to do a comprehensive review of the lease contract and evaluate all the risks and legal responsibilities involved.
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