Triple Net Leases - How to Create Less Headaches and More Income

Triple Net Leases - How to Create Less Headaches and More Income

The name of the game in commercial real estate is all about lowering expenses and increasing income, and triple net leases let you do both. These leases, and others like them, are usually found in multi-tenant industrial or residential properties. They offer the investor the ability to pass some of the peripheral expenses of commercial real estate ownership onto the tenants.

The reason triple net leases are so important in the world of commercial real estate all comes down to valuation. Residential real estate is valued based on the building's characteristics like number or rooms, square feet and so on. These characteristics are compared to other sales in the area that have comparable specs and a price is derived. However, in commercial real estate instead of relying on "comps" value for the property is figured by the income it produces. Thus, in order to increase the value of your commercial real estate you need to find a way to increase net income. Net income is figured by subtracting expenses from revenues, in the form of rents and fees. So if you can find a way to increase your revenues or decrease your costs your building will be worth more on the open market.

This is where triple net leases come into play. A net lease mandates that the tenant pay their rent and other fees in addition. If there is more than one tenant in the building then the costs are usually prorated according to the size of their section of the building. In a single net lease the tenant pays rent plus real estate taxes. A double net lease mandates that rents, taxes and insurance are all paid for by the tenant. Finally, and most advantageous for our purposes, triple net leases have the tenant pay the rent, taxes, insurance and all maintenance fees.

By passing off the costs of taxes, insurance and maintenance you effectively lower your costs. The tenant is offered lower fixed rents, and will particularly like this arrangement if the building is newer or has been updated recently. Having a building already up to par is key on selling your tenants on this arrangement as it will help minimize their maintenance costs and allow them to more easily predict their monthly outflows.

Many investors steer clear of commercial real estate because of the horror stories they have heard about tenants, expenses and a host of other issues that have plagued other investors. Yet, just like anything else in the world if you cover your bases with the proper legal agreements, buy at a good price and know the market you will be fine.

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