The value of the real estate leased on a triple-net lease basis impacts the value of the lease in two opposing ways. It impacts the value of the lease positively because a higher value property commands a higher rental rate, but it also impacts the value of the lease negatively because of the obligations of the tenant under a triple-net lease. A higher property value means higher property taxes. Since payment of property taxes is one of the responsibilities of the tenant in a triple-net lease, the fact that the tenant has to bear that higher expense means a lower net amount that the landlord can obtain in rent.

Valuing Real Estate

The value of triple-net leased real estate is determined much like the value of any other real estate. The key determining factors in the value of the real estate are its location, the value of neighboring properties and the condition of the real estate. Other factors that impact the value of the real estate are such things as easements and restrictions that affect what the owner of the real estate can or can't do with the property. Triple-net leases are typically long-term, but it's important for the owner leasing the property to be able to make necessary adjustments to the property when the lease ends that enable him to command the highest rent possible from the next tenant.

Triple Net Leases

Triple-net leases are a popular commercial real estate investment. Common triple-net lease properties are those used for convenience stores, pharmacies or fast food restaurants, but they may also be set up for office buildings or industrial firms.

A triple-net lease is one where a property is leased net of the three primary expenses of property taxes, maintenance and insurance. All of those expenses are paid by the tenant, who also pays to the landlord a net rental amount, but one that is substantially lower than the rent for a conventional lease where the landlord is responsible for the primary property expenses.

The main advantage of a triple-net lease for the landlord is that he is essentially free of all the usual obligations of a landlord and can simply collect the monthly rent. A triple-net lease is ideal for an individual seeking a passive form of real estate investing.

Triple-Net Lease Risks

Triple-net lease investments are not risk-free. Common risks to the property owner/landlord include interest rate risk, credit or bankruptcy risk, and end of lease expenses.

Interest rate risk exists if the property is refinanced during the lease term. The rent yield realized on a triple-net lease is generally in the range of 4 to 6%. If significantly higher interest rates exist at the time of refinancing, then the higher interest rate negatively impacts the income received from the lease.

Credit or bankruptcy risk exists even with a good tenant because of the long-term nature of triple-net leases, more than enough time for economic or market conditions to change sufficiently to push a once profitable business into insolvency.

At the end of a triple-net lease, the process of reconfiguring and re-leasing the property can potentially be time-consuming and costly.

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  2. What kinds of real estate transactions use triple net (NNN) leases?

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