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.
Triple net leases are becoming more popular in the Houston area. Here, they are obviously less expensive for the property owner, and can allow a truly passive form of income for the property owner. With one of Houston's triple net leases, a property owner can be hands off, which is exactly what more and more property owners are looking for. Of course, there are down sides to them as well.
Most triple net leases give control of the property to the lessee, which can be either a good deal or a bad deal, depending on who the property owner is dealing with. They provision the renter to pay for maintenance as well as other costs associated to property ownership.
Before ever purchasing one, potential owners should have these leases looked over by a Houston real estate attorney to be assured that the property owner can still control structural changes to the property as well as enforce the general maintenance that the property requires.
While a property owner can simply go online and download a lease agreement, these leases in particular can work against the owner of the property. Legally speaking, it is very difficult for a property owner to deny liability for destruction of property, especially if they are being held accountable by a third party. A well written, clear and concise lease can help avert such situations.
Every triple net lease property for sale in Houston is going to vary at least in structural repair requirements. Many of them require the tenant to pay for everything except roof repairs while some require everything including roof repairs. A bond clause requires the tenant to pay for the property even if the property doesn't exist anymore, such as the loss resulting from fire, flood, earthquake, or other natural disasters.
Triple net leases are a hard sell for potential tenants, regardless of whether you are referring to residential tenants or commercial tenants, and there has to be a motivation for the tenant. There is an exceptional amount of negotiation associated with them, and potential purchasers should yield to caution when entering a pre-existing lease.
Leases for sale with huge profit potential can be difficult to find. They take a bit of cultivation, and a bit of finessing to create the perfect situation. If the tenant of a triple net lease is not worthy of the sale, the sale will often never materialize.
Both the landlord and the tenant can benefit from a triple net lease and can experience great frustration from them too. Keeping in mind that the tenant who agrees to one needs to get something out of it, purchase of a triple net lease in Houston can lead to more pitfalls than necessary if the situation hasn't been scrutinized.
In most cases, residential leases in Texas are rare. It costs too much money. The only notable exception to that rule refers to some apartment buildings, usually units that house between 6 and 12 units. These can be an acceptable alternative to home ownership under the right circumstances. The vast majority of triple net properties in the area are commercial properties.
Finding an ideal triple net lease for sale in Houston or the surrounding area can be considered an impossible task. Because they are unique between landlord and tenant, most ideal situations are created rather than purchased. Those leases which are up for sale are often good situations, but a potential owner is hard pressed to find a perfectly ideal situation unless they have created it for themselves.
Creating one and then selling it can be ideal for those looking for a high end real estate business. Some of these leases are signed for as long as 50 years, offering up some very tempting terms for a potential buyer. After all, provided that the lease is signed for an extended period of time, the lease can provide a significant income-expense ratio for the owner. Additionally, the resale of one can also bring in revenue.
Anyone considering purchasing a triple net lease for sale in Houston should never consider the purchase without the assistance of an attorney for the simple reason that these leases are personalized per situation.
A great find will still be a great find after a lawyer looks over the lease. A good find can turn into a great find after an attorney evaluates the lease. Then of course, a lawyer can save you much headache and pain when it comes to a triple net lease that shouldn't be touched with a single dollar.
Both Tony Seruga, Yolanda Seruga And Yolanda Bishop & are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.