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Triple-Net Leases NNN

Franchise Tips

I have been working on several commercial real estate projects that utilize triple-net leases (NNN). A tip out of the gate is be careful the prospective tenants possess a clear understanding of triple net leases and what is involved.

There is really not a tremendous amount of mystique behind the NNN, other than a symbol for additional expenses paid by the tenant beyond the rental or lease payments. In a triple-net, the lessee will usually pay a monthly rent along with all taxes, insurance, and operational / maintenance expenses that occur from the use of the property. The lessor (investor) is responsible for capital improvements on the building, such as roof replacement or major structural components. Again, be very clear in the terms of the lease agreement who has responsibility for majors building systems like mechanical, HVAC, Electrical, as well as major repairs.

I’m sure all of you real estate entrepreneurs looking to jump into commercial real estate development with triple-net leases are asking about financing at this point. A common method is for the investor to form a LLC to hold the real estate and use a credit tenant lease method for financing. The investor borrows money to finance the property and pledges as security the rents to be received from the tenant.

This is an excellent method for obtaining construction money if you lack assets or collateral to pledge. However, this will require a creditable tenant with an executed long-term lease in place and a bank or conventional financing institution to go along with it. Also see non-recourse debt.

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CIRE Magazine

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