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Articles and Definitions

What is a Triple Net Lease Definition
& How They Compare to Other Commercial Investments

Triple Net Lease definition: The renter is accountable for their proportionate portion of property taxes, insurance, shared operating expenses and shared area utilities. Renters are additionally liable for all expenses connected with their own occupancy including personal property taxes, janitorial services and all utility payments. If tenant’s premises are a portion of a larger property, the common area maintenance charges (CAMS) will be segmented amongst the renters of the building, usually based upon the renter’s square footage percentage of the total complex. Normally, the property owner will be accountable for the structural integrity of the building.

NNN Definition Types:

Net leases determine the obligations of both the owner and the lessee. Below are the net lease definition phrases which are most prevalent:

  • Single Net Lease Definition – Lessee accepts to pay a monthly base rent and agrees to pay the property taxes. The owner is accountable for all other operating expenditures of the property.
  • Double Net Lease (NN) Definition – Lessee consents to pay a monthly base rent, property taxes and property insurance. The owner is accountable for all other operating expenditures of the property.
  • Triple Net Lease (NNN) Definition – Lessee consents to pay a monthly base rent, property taxes, the property insurance, and the maintenance.In a triple net lease, there may be several legal protective clauses which could release a lessee of his obligations. For instance, a triple net lease may release the lessee of his accountability if the property is subject to an eminent domain procedure.
  • Bond Lease / Absolute Triple Net Lease Definition – Lessee consents to pay a monthly sum base rent, property taxes, property insurance and maintenance. With a absolute triple net lease there are no legal protections if a lessee fails to meet his financial duties.

What is triple net lease compared to other forms of commercial investments?

Compared to office , warehouse , storage facilities, parking lots, apartments and other forms of commercial investments, triple net leases are by far the most stable and less burdensome of the opportunities available. Most of the ventures mentioned above have business related and management associated with their financial outcome.Gross leases and modified gross leases associated with most office and industrial buildings involve landlord responsibilities under various conditions. These entities have numerous obligations for the landlord to oversee or pay. When many duties or responsibilities are passed on to the investor, a much larger return should be expected for the work and financial burden placed on the landlord. Most of these types of investors are younger in age and can tolerate the various problems that occur monthly.The baby-boomer’s and older investors ready to retire, have little desire to be responsible for all of these matters and prefer a smaller return that is safer and less stressful.

From Westwood Net Lease Advisors

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NNN Lease Investments
‘What Should You Do During Your Due Diligence Period?’

The due diligence period typical for most commercial NNN lease investments is 30 days in length after the execution of the purchase contract by the seller and buyer.

  • There are two choices the purchaser is faced with at the end of the said period, continue on with the sale and close or cancel the contract and receive back the earnest monies held at the title company in escrow.
  • To avoid possible arguments of the refund, the purchaser when drafting the sale contract of the NNN investment should add the following language in the agreement: “In the purchaser’s sole discretion he or she may void such contract during their 30 due diligence for any reason by giving written notice to the title company that does not require the approval of said seller to receive back their earnest money.”

PHYSICAL INSPECTION OF COMMERCIAL NNN INVESTMENT

The physical inspection should be well planned in advance and a professional inspection engineer may be warranted.

Most owners will not allow the prospective purchaser to discuss the potential sale with the present tenant of the NNN leased property. True NNN leases provide that the tenant maintain the structure, pay the taxes, insurance and common area maintenance of the facility thus talking to the tenant will only cause the present ownership hardship by exposing the building is for sale when it is not necessary. The purchaser must still determine if the building’s roof, hvac, parking lot and structure are in good shape in case the NNN lease holder defaults on the lease through bankruptcy. The Disability Act must be addressed as for meeting the compliance issues and the environmental condition of the building and land is given a clean bill of health with a phase one inspection report.

NNN LEASE REVIEW AND REPORTS

The NNN commercial lease should be examined by a real estate attorney and approved by the purchaser during this due diligence period. Also an updated title report and survey must be ordered and examined to grant clear insured title to the purchaser. This may expose any and all restrictions, easements of record, including lot size, footprint of building and set backs of the triple NNN property.

LOAN APPLICATION

If a loan is contemplated by the purchaser, this is the time frame that it should be applied for to determine the amount, interest rate and the terms of the loan and fees. If these numbers do not make economic sense, than the purchaser may at his or her option void the pending commercial NNN leased property contract and receive all earnest money.

BOOKS AND RECORDS OF NNN SELLER

Another key component of the due diligence period is to examine the books and records of the seller displaying the income and expenses of the past three years if possible. Finding the sales history of the NNN leased tenant and the true responsibility of the landlord verses the tenants is critical.

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Contact KW Commercial for an assessment of your commercial real estate investment strategies.

KW Commercial * Keller Williams Advantage Realty * 1351 Alafaya Trail, #100 * Oviedo, 32765 *
Phone: (407) 977-7600 Fax: (407) 977-7612 Direct: (407) 712-5166