Triple net leases are one of the most common lease types in the commercial real estate market. This type of lease is beneficial, especially to landlords. However, some tenants do enjoy the level of control NNNs grant them.
It’s often said that California’s triple net leases are somewhat different from those in other US cities. In this article, we’ll discuss NNN leases, and answer the question “are triple net leases common in California?” Further along the way, the question “are California triple net leases different in any way?” will also be answered. So, read on and find out for yourself.
What is a Triple Net (NNN) Lease?
A triple net lease (also known as an NNN lease) is a type of real estate lease arrangement in which the tenant is required to pay a portion of or all the property’s continuing expenses. These expenses include real estate taxes, building insurance, and maintenance, in addition to the rent and utilities.
Why are Triple Net (NNN) Leases so Common?
NNN leases are just one of several lease types we have. Triple net leases are usually common among landlords because they eliminate some of the uncertain financial risks associated with commercial real estate.
If the cost of taxes or insurance rises, or if unforeseen maintenance requirements arise, the tenants are responsible for handling these increased expenditures. This lease type is beneficial to landlords and particularly beneficial to new investors.
The Upsides of Triple Net Leases
Like every other type of lease, NNNs provide several advantages. Below are five of these benefits that’ll intrigue you about triple net leases:
- NNNs Provide Consistent Income
Every real estate investor is looking for a consistent stream of income, and thus it’s not uncommon to see these individuals venture into several opportunities at the same time in their quest to generate a steady inflow of funds.
Triple net leases are often designed with a set rent or a predetermined increase in the lease payment to allow for inflation. It’s rare to find a three percent rent rise built into a triple net lease arrangement, implying that the property owner should expect to see some profit growth even if the lease spams for a long time period.
- These Leases are Long-term
The average commercial real estate lease is no longer than three to five years. NNNs, on the other hand, can go beyond 25 years. In rare cases, you can obtain ground leases for up to 99 years. Having a longer lease period means a landlord doesn’t need to worry about having a vacant property.
- You Have Minimal Responsibility as a Landlord
Triple net leases are passive investment opportunities. Hence, they provide income without the investor actively performing managerial duties. The landlord has minimal responsibilities because most of the cost of running the property is transferred to the tenant through the lease.
Tenants are typically responsible for paying property taxes and insurance, as well as any construction or capital costs required for easy use of the land. They are also responsible for the operating expenses required to maintain the building(s).
- They’re Transferrable Leases
Another advantage of triple net leases is their transferability, meaning that even if a lease is in place or the property is occupied, you can transfer ownership of the property to another individual. Commercial real estate isn’t liquid, but you can sell it after a reasonable amount of time.
- Increased Protection Against Potential Expenses
Because the property’s ownership and management costs are passed on to the tenants who benefit from the building, the landlord isn’t liable for the difference if any of these costs rise. If, by any chance, common area maintenance charges (CAM) increase, it’s left to the tenant to resolve these differences.
The Drawbacks of Triple Net Leases
NNNs aren’t flawless leases, they also come with several downsides that you should consider before agreeing to one, including:
- These Leases Often Come With High Rollover Costs
It’s common knowledge that changing leases come with rollover costs. However, these costs are often higher with triple net leases than with residential or shorter-term commercial leases.
Simply, if you have had a tenant using your property for more than 25 years and they don’t provide the necessary maintenance, the real estate is bound to sustain damage.
When the lease period elapses, you’ll have to pump a significant amount of money into renovations to ensure the building is ready for the next tenant.
- Finding a Tenant is Sometimes Difficult
Since NNNs favor landlords the most, potential renters shy away from these types of leases. The number of responsibilities accompanying triple net leases for tenants can sometimes be overwhelming.
So, interested participants might walk out of an agreement after much consideration. If, as a landlord, your property’s lease ends, it’s sometimes tasking to find new occupants.
- You Have Limited Control Over Your Property
As a landlord in a triple net lease agreement, you end up giving up some level of control of your property. You assign these responsibilities to the occupants and remain uninvolved in the daily operations of the building.
Since tenants are fully in charge of the day-to-day running of the building, you’re left unaware of any structural issues on the ground.
Commercial tenants are usually responsible for certain off-lease items like Internet and telephone service. In such a case, a potential business tenant should inquire about the house’s telecommunications provider (T-Mobile, AT & T, Verizon, etcetera.).
In addition to the carrier name(s), consider the physical connections to the building. Is the building, for example, connected to the Internet through fiber optic cable? Is fiber service available in the area?
You can also check if the building receives service from several carriers. These steps are crucial if you’re thinking of boosting your Internet connection.
Forms of Commercial Properties
Commercial properties you can implement a triple net lease structure on include:
- Multi-family Properties
These include duplexes, garden apartments, high-rise apartment buildings, basically any building with the primary purpose of residency.
- Office Buildings
Like multi-family apartments, offices also come in a high-rise, mid-rise, and low-rise structures. There are also several alternatives to commercial office properties.
Alternatives to Signing a Commercial Office Space Lease
- Local co-working spaces
- Business Incubators
- Home offices
- Executive office suites
- Industrial Real Estate
Industrial real estate involves using property to produce and manufacture goods and products. These assets also include logistics buildings that facilitate the transportation and storage of products and commodities. Industrial buildings also vary in size, depending on their use.
With retail real estate, investors can rent, lease, manage, acquire, or sell the property for use as shopping malls, individual businesses, etcetera. Retail stores in the United States include everything from supermarkets to pharmacies, to dry cleaners and cafés.
- Hospitality Real Estate
Hospitality real estate entails using the property for hotels, inns, and even small guest houses.
This form of commercial property is obvious; it involves purchasing, leasing, or selling land for several purposes, including plantation use and erection of structures. These plots can also be left unused until their values increase, at which point the owner can choose to sell.
Are Triple Net Leases Common in California?
Like in every other state, triple net leases are equally popular in California, but are California triple net leases different in any way? For most parts, the lease structure in California is the same as in every other state.
However, rent in the Golden State is determined by square feet every month. This calculation opposes the per square foot per year calculation in other states.
So, three dollars per SF in California equals 36 dollars per SF in Los Angeles. The real estate market is very active in California, especially with the continuous rise in prices.
You may be wondering, why is California called the “Golden State”? This state in the western US got its nickname during the 1884 gold rush when miners discovered significant quantities of gold in the state. Triple net properties are the new gold so you might want to jump in and grab your share.
Does a Triple Net (NNN) Lease Favor the Tenant or the Landlord?
More often than not, this question pops up in the minds of real estate investors and tenants looking to sign a triple net lease agreement. If you think NNNs favor landlords more, you’re correct. Considering most of the property’s managerial responsibilities are off the landlord’s shoulders, why do tenants still agree to NNN lease terms?
To an extent, a tenant’s ability to negotiate terms in a NNN lease depends on the particular geographic area. It’s not uncommon in most regions to acquire a triple net lease if a tenant wishes to lease a commercial property.
However, in other locations, especially in smaller cities, utilizing NNN leases is less common. However, tenants still have room to negotiate favorable terms in the agreement.
For starters, the base rental amount becomes a crucial bargaining chip. The tenant may negotiate a cheaper basic monthly fee if they bear the risk and responsibility for the property owner’s expenses.
Also, the specific goods included as part of the overhead in triple net leases occasionally vary. Tenants can bargain to keep the landlord liable for specified maintenance bills and/or utilities.
As aforementioned, NNNs are lease structures that favor landlords in several ways. Hence, most tenants tend to back out of triple-net deals because of the amount of responsibility they’re left to handle.
However, NNNs are advantageous in several ways to both landlords and tenants. This lease structure also comes with its cons. It’s necessary to consider these downsides before investing in triple net leases for sale in California.
The question “are California triple net leases different in any way?” is one often asked by individuals looking to invest in NNNs. However, the slight difference between the Golden State’s triple net (NNN) and other states’ falls on the rent payment basis.