SS121: What Does NNN Mean In Real Estate

SS121: What Does NNN Mean In Real Estate

Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing What is an Interest Rate Cap. Interest rate caps are an important part of real estate financing. In this episode, Charles discusses what an interest rate cap is and why it should be obtained when you are purchasing properties with variable-rate debt.

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  • When reviewing commercial real estate properties such as; industrial, office, or retail; owners and brokers will typically use a triple net lease structure. While most people are familiar with full-service leases that are used with residential properties, where landlords are covering all expenses; leaving the tenant to just pay the monthly rent payment. Triple net leases pass the expenses through to the tenant.
  • What Is a Triple Net Lease Also Known as NNN?
    • A triple net lease is a net, net, net lease. It signifies that the tenant is paying for most of the expenses. Tenants pay the base rent plus taxes, property insurance, and operating expenses also known as common area maintenance expenses or just CAM. Since the tenant is covering these costs, the rent base rent paid by the tenant is generally lower than the rent amount charged in a full-service lease agreement. Tenants are also responsible for paying their own utilities.
  • How Do You Calculate a Triple Net Lease?
    • There are 2 main parts to the triple net lease; the base rent and the NNN or other expenses. If you are looking to rent a 1,000 sq. ft. retail space in a strip mall and it is advertised that the base rent is $20 an sq. ft. The base rent for this property is $20,000 per year; 20 x 1,000 or just under $1,700 per month. The next part of the calculation is the net, net, and net expenses. In this broker listing; they mention that the NNN expenses are $5. You multiply the 5 x 1000 and get $5,000 as the net, net, and net annual fees. Lastly, you add the annual base rent to the total annual fees; in our example, this would be $25,000 or just under $2,100 per month.
    • Potential tenants are now able to compare, apples to apples, one commercial property with another. It is important to note that common area maintenance expenses are calculated by the total square footage of the property and the size of each unit/office or store. For example; a 100,000 sq. ft building that has an anchor tenant with 60,000 sq. ft; will typically pay 60% of the CAM fees.
  • What Specifically are Common Area Maintenance expenses, Also Known as CAM?
    • These maintenance expenses include;
    • Roofs
    • HVAC
    • Exterior maintenance
    • Landscaping
    • Utilities for the building
    • Parking lot
    • Snow removal
    • Signage
    • Security
    • Possibly any HOA fees
  • What are the Advantages and Disadvantages of a Triple Net Lease?
    • Advantages for tenants
      • The tenant has direct control of the expenses (maintenance, repairs, upkeep,) that would otherwise be out of their control.
      • Tenants are able to protest their property taxes and select their preferred insurance carrier.
    • Advantages for landlords
      • Landlords receive consistent income with minimal management hassles; since most expenses, including; utilities, maintenance, repairs, taxes, and property management are the responsibility of the tenant.
    • Disadvantages for tenants
      • The tenant is assuming much more risk when compared to a full-service lease. If taxes or insurance increase during their lease term; they need to pay them.
      • Tenants are assuming the cost of maintaining the property and it is unknown how much repairs will be during the lease term. In addition, tenants will spend time handling property management; hiring contractors for repairs to negotiating insurance policies.
    • Disadvantages for landlords
      • Finding good commercial tenants is not easy. It is not like renting apartments where most units can be rented within a couple of weeks of making ready.
      • Downtime is a real, expensive factor in commercial real estate. Everyone has driven by a commercial property that has been vacant for years with some broker’s sign in front. Someone is paying taxes, insurance, utilities, and management expenses on that property.
      • A partner of my father’s once told me that commercial properties are great when they are occupied but, are very expensive when they are vacant.
    • Other Types of Commercial Lease Structures
      • Gross leases or full-service leases – gross leases or full-service leases are where a tenant pays a flat annual rental fee. This one fee includes what the landlord estimates to be the; insurance, taxes, and operating expenses for the unit. This lease structure is similar to a residential lease where the landlord includes all expenses into one set rental fee.
      • Modified gross leases – a modified gross lease is a mix of landlord and tenant-paid expenses. The tenant will usually pay an agreed-upon base rent, their own utilities, and a portion of their net, net, net fees. In a modified gross lease it is typical for the landlord to pay taxes and insurance while having the tenant pay their portion of the operating expenses.
      • Single net leases – with single net leases or just “N,” the tenant is responsible for paying the landlord the base rent and the real estate taxes. The landlord is responsible for paying the building insurance in addition to their portion of the operating expenses.
      • Double net leases – double net leases or just “NN,” are where the tenant is responsible for paying building insurance and property taxes while the landlord pays the operating expenses.
      • Absolute net, net, net leases – with an absolute NNN lease; tenants cover all of the expenses associated with the operation, maintenance, repairs, and upkeep of the property. This type of lease is more common with established, long-term, single tenants.
      • Percentage leases – with percentage leases, the tenant is responsible for paying a base rent, along with operating expenses in addition to a percentage of their monthly revenue. Since the tenant’s sales will vary from month to month; this variable expense will change monthly.
    • Investing in Triple Net Lease Properties
      • Triple net lease properties are some of the safest real estate investments and are sought after by investors looking for low-risk and stable income. It is normal for triple net leases to have a term of 10, 15, and 20 years or more with built-in rent escalation.
      • I recently saw a single tenant, triple net lease property, for sale that had been constructed in the last 12 months and had been leased to a well-established, Fortune 25 tenant, for 25 years. This type of real estate investing is similar to buying a corporate bond from a Fortune 25 company.

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what does NNN mean in real estate?

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Charles:
When reviewing commercial real estate properties such as industrial office or retail owners and brokers will typically use a triple net lease structure.

Charles:
While most people are familiar with full service leases that are used with residential properties where landlords are covering all expenses, leave in the tenant just to pay the monthly rent payment. Triple net leases pass the expenses through to the tenant. So what is a triple net lease, also known as nnn? Well, a triple net lease is a net net net lease. It signifies that the tenant is paying for most of the expenses. Tenants pay the base rent plus taxes, property insurance, and operating expenses, also known as common area maintenance expenses are just cam. Since the tenant is covering these costs, the rent base paid by the tenant is generally lower than the rent charged by a full service lease agreement. Now, tenants are also responsible for paying their own utilities. So how do you calculate a triple net lease? There are two main parts to the triple net lease, the base rent and the net.

Charles:
Net net or other expenses. If you’re looking to rent a 1000 square foot retail space in the strip mall, and it is advertised that the base rent is $20 a square foot, the base rent for this property is $20,000 per year. So $20 times 1000 square feet, or just under $1,700 per month. The next part of the calculation is the net net net expenses. In this broker listing, they mention that the net net net expenses are $5. So you multiply the $5 times 1000 square feet and you get $5,000 as the net, net, net annual fees. Lastly, you add the annual base rent to the total annual fees. In our example, this would be $25,000 or just under $2,100 per month. Now potential tenants are now able to compare apples to apples one commercial property with another. It’s important to note that common area maintenance expenses are calculated by the total square footage of the property and the size of each unit, office or store.

Charles:
For example, a 100,000 square foot building that has an anger tenant with 60,000 square feet of it will typically pay 60% of the CAM fees. So what specifically are the common area maintenance expenses? Well, these expenses include roofs, hvac, exterior maintenance, landscaping, utilities for the building, which is usually hallway lights, parking lights, exterior lights the parking lot, snow removal, signage, security, and possibly any HOA fees. What are the advantages and disadvantages of the triple net lease? Well, advantages for tenants are the tenants have direct control over the expenses, maintenance, repairs, and the upkeep that would otherwise be outta their control. Tents are also able to protest their property taxes and select their preferred insurance carrier. Advantages for landlords are landlords receive consistent income with minimal management hassles. Since most expenses including utilities, maintenance, repairs, taxes, property management are the responsibility of the tenant. Now, some disadvantages for the tenants are the tenant is assuming much more risk when compared to a full service lease.

Charles:
If taxes or insurance premiums increase during their lease term, they need to pay them. Tenants are assuming the cost of maintaining their property and is unknown how much repairs will be during the lease term. In addition, tenants will spend time handling property management hiring contractors for repairs to negotiating insurance policies. Now, disadvantage for landlords, the number one is a, finding good commercial tenants is not easy. It’s not like renting apartments where most units will be rented within a couple weeks of make ready Downtime is a real expensive factor in commercial real estate. Everyone has driven by a commercial property that has been vacant for years with some broker sign in front of it. Someone is paying taxes, insurance, utilities, and management expenses on that property as it sits vacant. Now, a partner, my father has once told me that commercial properties are great when they’re occupied, but they’re very expensive when they’re vacant.

Charles:
Other types of commercial lease structures you might see are gross leases or full service leases, and these are where the tenant pays a flat annual rental fee. This one fee includes want the landlord estimates to be the insurance taxes and operating expenses for the unit. This lease structure is similar to a residential lease where a landlord includes all expenses into one set rental fee. Next is the modified gross lease, and it is a mix of landlord and tenant paid expenses. The tenant will usually pay and agreed upon base rent, their own utilities, and a portion of their net net net fees. In a modified gross lease, it is typical for the landlord to pay taxes and insurance while having the tenant pay their portion of the operating expenses. Single net leases with single net leases or just N the tenant is responsible for paying the landlord the base rent and the real estate taxes.

Charles:
The landlord is responsible for paying the building insurance in addition to their portion of the operating expenses. Double net leases. So double net leases or just NN is where the tenant is responsible for paying building insurance and property taxes while the landlord pays the operating expenses. Absolute net. Net net leases with an absolute lease like this, tenants cover all the expenses associated with the operation, maintenance, repairs, and upkeep of the property. This type of lease is more common with established long-term single tenants. The last one is percentage leases with percentage leases. The tenant is responsible for paying a base rent along with operating expenses in addition to a percentage of their monthly revenue. Since the tenant sales will vary month to month, the variable expense will change monthly. Now investing in triple net lease properties, triple net lease properties, trippen Atley properties are some of the safest real estate investments and are sought after by investors looking for low risk in stable income. It is normal for triple nett leases to have a term of 10, 15, and 20 years or more with built-in rent escalators. So I hope you enjoyed. Please remember to rate, review, subscribe, submit comments and potential show topics at globalinvestorspodcast.com. Look forward to two more episodes next week. See you then.

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Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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