You’ve got questions, and we’ve got answers. Read on to learn more about the ins and outs of triple net lease investment opportunities in commercial real estate in Canada today.
What Is a Triple Net Lease?
A triple net lease is just one of several options landlords typically offer tenants who want to rent space in their commercial real estate buildings.
A gross or full-service lease is one in which a tenant pays a landlord a flat monthly or annual rental fee, with the understanding that the landlord will be responsible for covering all operating expenses associated with it, including utilities, insurance, property taxes, maintenance, etc.
In addition to gross leases, landlords can offer three types of net leases: single net leases (N), double net leases (NN) and triple net leases (NNN). In each case, the tenant pays base rent plus a prorated or full share of one or more costs associated with the commercial property.
- Single Net (aka Net, N) Leases
A single net lease requires tenants to pay base rent plus some (or all) of the annual property tax on the building or space, while the remainder of the operating costs remain the landlord’s responsibility. - Double Net (aka Net-Net, NN) Leases
With a double net lease, tenants pay base rent plus property taxes and insurance for the space or building they occupy. - Triple Net (aka Net-Net-Net, NNN) Leases
Triple net leases start with base rent, then add property taxes, insurance and most of the costs of operating the building – including utilities and building maintenance – to tenants’ monthly bills.
Net leases are common for stand-alone office and industrial real estate, or retail spaces associated with fast-food restaurants, convenience stores, gas stations and big box outlets.
What Are the Benefits of Triple Net Lease Investments?
As an investor, triple net leases are highly desirable, as they require few responsibilities other than collecting rent.
Additional benefits of investing in NNN real estate include:
- Protected Profit Margins
Because tenants are responsible for almost all operating expenses associated with the leased property, market factors such as inflation and increases in commercial real estate valuations in hot markets – which can rapidly escalate costs related to building maintenance and property taxes – are the responsibility of tenants, not investors. This keeps investors’ profit margins more or less fixed and shielded from almost all negative scenarios except unplanned vacancies. - Predictable Passive Income
Because lease terms for tenants within triple net properties can be anywhere from five to 15 years, investors have a more predictable cash flow and can count on a steady source of passive income for more extended periods. - Favourable Financing Rates
Lenders often extend favourable downpayment and financing terms for investors who sign well-known or reputable tenants to a triple net lease, allowing for as little as five percent down, compared to the usual 20 per cent or more associated with other lease configurations.
What Are the Drawbacks of Triple Net Lease Investments?
As with any commercial real estate purchase, NNN investments come with risks, including:
- Vacancies
If an owner leases their property to a single, high-profile tenant in the interest of creating more stable cash flow and capitalizing on favourable financing, if the tenant leaves, the loss of all income can quickly erase those benefits. Landlords are at their most vulnerable when a tenant’s lease is due to expire, and the tenant has yet to declare their future intentions. - Different Standards for Building Maintenance
Tenants and landlords may have vastly different standards regarding building maintenance, creating issues that can lead to a decline versus appreciation in property value. - Difficulty Reconfiguring the Property
Because tenants such as fast-food chains and other retail franchises usually require custom buildouts to conduct their businesses, investors may face significant renovation costs when reconfiguring the property for a new tenant.
How Do I Evaluate a Triple Net Lease Investment?
In addition to regular due diligence tasks like checking on zoning and permitting, doing a building inspection, environmental site assessment and delving into location and market analysis, because tenants in NNN properties are the engines of investor profit, one of the first things to do when evaluating a triple net lease investment, is to confirm the monthly and annual cash flow. Investors can do this by reviewing the seller’s rental receipts and bank statements.
Next, you’ll want to check the end dates for all tenants’ leases. If the end dates are soon, it adds risk to the purchase.
If you’re satisfied that there’s still plenty of time left on most or all tenants’ leases, you’ll want to brush up on your commercial real estate vocabulary so you can examine each lease in detail to ensure you know what your responsibilities are versus those of your tenants. You’ll also want to determine if any caps are in place for costs, including annual maintenance, property taxes, insurance and utilities. If there are, as the new landlord, you’ll be responsible for paying anything over the negotiated cap.
Investors should also confirm allowable annual rent increases within each lease agreement (as each tenant could have negotiated different allowances and caps) and note the lease holdover rates for tenants who overstay their terms.
Lastly, you’ll want to run current credit checks on all tenants. As mentioned above, tenant creditworthiness can impact not just cash flow but also lender financing rates, terms and more.
What’s The Typical Duration of a Triple Net Lease?
Most NNN properties usually lease for 10 to 25 years, but you’ll also find “value-add” opportunities with shorter lease terms in the one- to five-year range.
Depending on the previous lease rates and when lease terms expire, there could be an opportunity to increase profits by looking for new tenants and raising rates to current market values.
How Do I Finance a Triple Net Lease Investment?
Because triple-net commercial real estate properties usually provide investors with a more stable income stream, they’re often priced higher than similar properties with different lease structures.
Even if your usual lending institution has traditionally offered you great rates and terms, you might want to consult a mortgage broker specializing in sourcing loans for commercial real estate – and triple net lease properties in particular – to save time and ensure you’ve got the best deal.
How Do I Find Triple Net Lease Investment Opportunities?
One of the quickest ways to find the best NNN lease properties is to work with an experienced local commercial real estate professional.
Once brokers understand buyers’ needs and criteria, they can quickly sift through listings and network with contacts to find untapped opportunities. They’ll help you compare and contrast properties and can also guide you through the entire purchase process, from start to finish.
The Net-Net-Net?
With a potential for long-term, stable cash flow, effortless capital appreciation and mostly hands-off management, triple net lease properties represent one of the more secure forms of commercial real estate investments available in Canada today.
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