Smart investors seek the most return for the least amount of effort. Therein lies the
appeal of triple-net properties, which offer the chance to work with major commercial
tenants while at the same time handing off some of the biggest responsibilities any
property owner will face.
Triple-net may align with your goals if you’re seeking a passive investment type that is
better known for reaping rewards than requiring repairs. If this resonates, read on to
find out if this is the right asset class for you.
Triple-Net Property Basics
Triple-net properties hold the tenant or lessee responsible for costs on building
insurance, maintenance, and real estate taxes (the three “nets”) in addition to all other
typical fees like rent and utilities. Long-term leases are the norm here, often running
between one and two decades in length. During the great majority of this time,
investors can typically sit back and accumulate profits.
The key to a successful triple-net investment lies in two elements: smart lease
structure and finding a reliably profitable tenant. Given that triple-net mandates that
the tenant shoulders the cost of maintaining the property, this structure presents a
relatively low-risk and profitable investment opportunity.
Investors who don’t want to bother with property management while preserving capital
and enjoying an assured income stream often opt for triple-net opportunities.
Additionally, investors seeking to replace a 1031 Exchange property may find these
deals attractive as well given the relative lack of involvement and regular rent
payments.
The tax benefits are particularly appealing if you, as the investor have significant assets
such as a business or house along with the intent to sell these for a major gain.
Investors of this type are often able to defer capital gains taxes by using triple-net
leased property in a 1031 Exchange.
Moreover, triple-net investors are able to use depreciation as a means of lowering their
taxes. Items that can be depreciated include roads, shrubbery, office machinery,
appliances, and additions or improvements such as a new roof.
Which Operators and Tenants Opt for Triple Net?
While you will find office and industrial operators amongst the clutch of triple-net
tenants out there, the majority of those who choose this lease structure manage retail
properties such as convenience stores, fast-food restaurants, big-box stores, grocery
stores, and gas stations. Additionally, government entities and agencies have also
proven to be good candidates for triple-net leases given their longevity and
consistency.
Money-conscious tenants may also choose a triple-net structure since rents tend to be
lower. Moreover, depending on your geographic area, triple-net leases may be the
norm for commercial properties.
Triple-net leases are popular among the multi-tenant industrial and retail property sets,
users whose expenses can vary greatly. Such a lease structure is also beneficial to the
landlord as the costs are passed along to the tenant, who then has the incentive to
keep costs low since they are footing the bill.
Business operators may find a stronger incentive to lease rather than buy a given
property when seeking to develop a triple-net franchise given that build-to-suit is
gaining favor. In such a scenario, once the lease is signed, the property owner builds,
for example, a Bank of America. Then the business operator can focus on his core
strengths—in this case, operating a neighborhood bank branch.
Because it’s triple net, the business operator maintains the building while paying
insurance and property taxes. If everything’s going according to plan, they pay their
lease and can still take home their business profit. So everybody’s happy.
