Understanding the Basis of NNN Properties: What Are the Pros and Cons of This Leasing Arrangement?
NNN (also Triple-N) is a leasing arrangement that absolves the landlord of all or most expenses related to their property when they hand them over to a tenant. This setup charges the tenant with three fee classes apart from the rent: the property maintenance fee, net insurance premiums, and asset taxes. In return, the landlord reduces a significant part of the rent. Read about the Pros and Cons of This Leasing Arrangement below.
Suppose the maintenance costs are much higher than they initially believed. Some tenants under this lease attempt to get rent concessions or terminate their contract before the agreed expiration date. However, the landlord may preempt this escape using a bondable net lease — a legal enforcer to ensure the tenant completes their term.
As such, home finders should do thorough research before investing in NNN properties. The same advice goes for the landlord. A different lease arrangement may be better in some cases.
These possibilities open up various considerations for both the landlord and the tenant. Consequently, we’ve compiled the benefits and risks of such properties. You should know the following before sourcing for NNN properties for sale in Florida or any part of the world.
Pros of NNN Lease Properties to the Landlord
Few lease agreements offer more benefits to house owners than the triple net. It’s even better when the landlord can earn attractive rents on the same property.
- Stable, Guaranteed Tenancy
Typically, a triple net lease lasts for an average of fifteen year. That’s fifteen solid years of absolution from property expenses. Meanwhile, the rents don’t stop throughout this period.
This arrangement optimizes rents from properties, as the typical time properties spend vacant is absent.
- Low-risk Approach
The NNN lease arrangement spares the landlord of all property expenses, including maintenance and tax. What else?
They receive monthly or yearly rentals throughout this period. As such, the risk of running at a loss significantly reduces. Some even say the triple net lease is risk-free.
- Dependable Income Stream
A triple net lease treats you to rents throughout the contract. Typically, these contracts last ten to twenty years, making an average of fifteen years. That’s a particular amount of money every year for at least a decade.
What’s better? This income stream is free from expenses. You won’t have to pay for anything concerning the asset.
The low-risk nature of a triple net lease makes it a common strategy to raise equity among real estate investors. A landlord may hold on for ten years (receiving passive rents) before listing the NNN property for sale when population spikes, the market peaks, or they’re willing to invest the gathered capital.
- Zero Landlord Responsibilities
A NNN lease absolves you of all landlord duties, relieving you from all monetary or time-consuming processes. This freedom provides the opportunity to focus more on other investment vehicles that need your time.
Cons of Triple Net Lease to the Landlord
NNN properties indeed offer excellent benefits to the landlord. However, there are specific disadvantages of this arrangement that you must remember before adopting this strategy.
- Earning Caps
The rent on NNN-leased properties is typically unchangeable throughout the contract — except if you and the tenant have a unique arrangement. This limitation deprives you of the power to add to the rent even if property prices spike. A triple net lease promises stable returns but no chance of vertical growth.
- Vacancy Risks
You can’t be 100% correct with your assessment of intending tenants. Therefore, it’s hard to know if a tenant will default on the arrangement and cause you to lose when the property is vacant. While it’s true that the law is on your side, it’s necessary to realize that a tenant may suffer financial ruin and become unable to fulfill the contract.
Pros of the NNN Lease Contract to the Tenant
The tenant handles all financial responsibilities in a triple net lease. Therefore, the general belief is that the arrangement offers them no benefits. However, why do home funders continue to lease NNN assets if this assertion is true?
- Long-term Business Location
The triple net lease is most advantageous to the tenant who uses the property as a business center. Why? They’ll have sufficient time to build their brand over the years.
It’s not recommended for young businesses to change locations, as it may cost them some customers. Furthermore, a NNN lease gives you complete control over the use of the premises for your business. You don’t have to worry about the landlord’s conditions.
- Assured Stability
Few leasing arrangements offer the stability that a triple net lease does to the tenant — just as it does to the landlord. The typical NNN contracts last for fifteen years.
This lease type saves you and your family from constant moving. Plus, you’ll have the leisure to run your house as you deem fit.
- Tax Benefits
The triple net lease charges the tenant with taxes, but they may take advantage of this arrangement if they run a business. How? Incorporating these expenses into their business administration costs gets their business tax benefits.
Cons of NNN Properties
NNN assets put the tenant at some disadvantages too. Let’s see what they are.
- Property Expenses
A NNN lease attributes property-related expenses to the tenant. Therefore, the tenant may have to spend on the building when they don’t expect to. Triple net lease tenants have to account for building operation expenses too.
In addition, some properties are constantly demanding maintenance and repairs. As such, the tenant may be splurging out on care more than they estimated initially.
- Tax Liabilities
The NNN tenant handles all taxes related to the property. Therefore, they are also responsible for all tax liabilities, such as penalties and fines for tax defaults.
- No Moving Freedom
NNN properties deprive the tenant of the opportunity to move whenever they deem fit. The tenant will have to wait until their contract expires — remember that’s such a long while. What else?
The tenant has to continue maintaining the property even when they pack out before their contract expires.
NNN properties offer unique advantages both to the landlord and the tenant. The agreement gives the landlord stable income and the tenant with an excellent property at a lower cost (in the best case scenario). It’s up to you to determine if the pros outweigh the cons before buying any commercial property for sale in Florida. Hope you love reading about Pros and Cons of This Leasing Arrangement.
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