FAQ: WHAT IS AN ABSOLUTE NNN LEASE?
Are you new to the world of commercial real estate investing and are finding yourself lost amid the sea of terms, acronyms, and lease types? If so, you’re in the right place. Learning how to invest in leases is a complicated and often time-consuming business, especially when it comes to NNN (Triple Net) leases and all the variations that those can come in. This article delves into the explanations and relationships behind these leases to help you figure out if commercial real estate investing in Triple Net leases will help your financial future.
What is an Absolute Net Lease?
In short, an absolute net lease has the tenant pay for absolutely everything while the investor has no maintenance responsibility. An absolute net lease is very similar to a ground lease, which has the tenant pay for everything they do with or on the land of the property. For example, a tenant may construct their own building and infrastructure while being responsible for paying for and maintaining everything. For Triple Net leases, tenants are in charge of building and maintenance responsibilities and the land owner and investor doesn’t have to deal with toilets, taxes or trash. With ground leases, the land owner and investors receive rent on the land, bearing no maintenance responsibilities and generating passive income — similar to NNN leases. The biggest difference between an absolute Triple Net lease and a ground lease is that ground leases tend to have longer lease terms, sometimes lasting as long as 99 years.
What is a Triple Net (NNN) Lease?
A Triple Net lease, also known as a “net lease” or “NNN lease,” is a long-term lease in which the tenant pays rent, real estate taxes and the building’s insurance costs. The tenant is also responsible for maintaining the property, including common areas like parking lots and areas shared with other tenants in a development. With net leases, investors enjoy regular high-yield passive income from monthly rent payments with limited management responsibilities.
NNN leases (or “Net, Net, Net”) have tenants pay for all expenses associated with running a building. You can remember the tenant’s expenses with the acronym “TIM”; the “T” stands for taxes, including the real estate taxes; the “I” stands for insurance, referring to the property and liability insurance; and the “M” stands for maintenance (and repairs). Investors of Triple Net properties get regular monthly income while having to deal with none of the building expenses.
Why are NNN Leases and Absolute Net Leases Often Confused?
Absolute net leases and NNN leases often get confused, especially because of stipulations in other types of leases not covered in this article. One problem that confuses investors is that some firms define key terms differently, including definitions for brokers, developers, property owners and property. There is no standard for how the terms are used; consequently, investors can understand the same words to mean different things according to their unique experience in the real estate space.
Seasoned Triple Net professionals understand, however, that the core principle of net lease investing is that investors should not be acting as landlords in a Single-Tenant Triple-Net lease. The tenant pays for everything in Triple Net leases except for some corporate expenses that you, as the investor, need to cover, like your own internal tax preparations hiring a property manager or bookkeeper. You need only to sit back and collect the tenant’s rent check while they handle property maintenance and expenses.
Ground leases are also frequently confused with net leases; the difference is that you do not own any structure that your tenant builds on the land with ground leases. Ground leases typically come with higher taxes because the land is not depreciable. On the other hand, absolute net leases are both tax-efficient and tax-sheltered; since investors own the buildings, they can take advantage of tax benefits from the building’s depreciation. This means more high-yield income when investing in Triple Net leases. Working with companies like Liberty Real Estate Fund can help you navigate this asset class to maximize your returns, minimize risk, and take advantage of the full range of benefits offered within the tax code.
How to Avoid Confusion Between Absolute Net Leases And NNN Leases
Professional investors use several strategies to keep track of their investments and avoid confusion between the different kinds of leases. Still, the most essential component of net lease deals is simply reading through the offering memorandum and the lease before signing for the property. Reading through all documents thoroughly is important because listing brokers may have included extra investor responsibilities within the terms of the lease that could make it a double net rather than Triple Net asset. This could shift expenses and more management responsibilities from the tenant to you, which means more costs and lower returns.
That is why investors must have a thorough due diligence process — to ensure that you are operating in your best financial interest. However, you should keep in mind that these commercial leases can run 50, 60, or even 100 pages in length. They are complicated legal documents that must be handled with care by either a seasoned, well-educated investor or a competent attorney acting on the investor’s behalf.
How would you like to learn more about absolute NNN leases and what investing in them could do for you? Contact Liberty Real Estate Fund today to find out more about how their experts can help.
What is the Difference Between Absolute Net Leases and Bond Leases?
A bond lease, sometimes known as a “hell or high water” lease, can be thought of as an extreme type of absolute net lease. In a bond lease, the tenant is responsible for not only property maintenance and structural repairs but also rebuilding the property in the event of an act of God — natural disasters like floods, earthquakes or extreme freezes, like in Texas in early 2021. Additionally, the tenant typically needs to continue paying rent even if the property is condemned.
How to Navigate Net Lease Commercial Real Estate Successfully
Successfully navigating net lease commercial real estate can be very tricky, especially for new investors with little experience in the industry. However, investors can use several tactics to increase their chances of seeing stable returns with low risk over a long period of time. The following are some key elements recommended by industry professionals for investors looking to invest in Triple Net leases.
The first thing that investors should do is conduct research, especially if they are new to the market. There are a myriad of different books and podcasts available to teach investors the dos and don’ts of the industry. The podcast called Nothing but Net – Triple Net Show talks about everything you might want to know about NNN commercial real estate investing, including the steps of signing a Triple Net lease and comparing good Triple Net properties with bad ones.
When investing in commercial real estate, investors should also take the time to analyze the companies they are considering investing in and the overall industry that those businesses belong to. Understanding the nuances of the tenant’s business can mean the difference between success and failure for an investor’s store. For example, say you are looking to invest in a Starbucks; you would want to know that a Starbucks should optimally be located on the morning side of a commute because that’s when people are buying the most coffee.
There are several different events and trade shows regarding Triple Net leases hosted for interested investors. However, these are primarily directed at institutional investors, so they would not be advantageous to industry newcomers and small-time investors; a good portion of the information presented would mostly be too advanced. But, suppose you are really dedicated to learning the ins and outs of the industry. In that case, you may find these events very helpful after you already have experience investing and are becoming familiar with the industry and looking for new tenants to replace the tenants whose leases are going to expire. Trade shows can help you locate and begin forming solid relationships with potential tenants for your property as well as network with other net lease experts and investors.
Understanding NNN leases and how they compare to other lease types can be a complicated process, but it is essential for investors looking to make successful returns within the commercial real estate industry. Hopefully, this article has been able to help you understand the differences between absolute NNN leases, Triple Net leases, ground leases and others. For any additional investment assistance, please reach out to Liberty Real Estate Fund and their seasoned net lease real estate experts will be able to help.
Are you thinking about investing in an absolute NNN lease but aren’t sure if it’s the best financial decision? Check out what the professionals over at Liberty Real Estate Fund have to say and take advantage of their dependable Net Lease asset class for real estate investment.