The NNN Lease, or triple-net lease, is a common lease structure used in commercial real estate. Despite it’s popularity, the triple net lease is still commonly misunderstood (and worse: mis-explained to clients). In this post, I’m deconstructing the NNN lease, debunking some misconceptions, demonstrating it all with an example, and just demystifying the whole dang thing. You’re quite welcome.
You’re a brand-new agent. Congrats! You’re hopefully feeling healthy mix of fired-up and completely-terrified. That’s good. Welcome to building a business.
Maybe you’re fortunate enough to have taken an entrepreneur class, or some high-level sales training. Maybe you’ve found a great Broker that’s investing in you and helping you build your sphere of influence. Maybe you’re completely rebranding yourself from a different career and reintroducing yourself to everyone as “their old buddy that’s a new Realtor! Isn’t that GREAT?!?” Maybe that’s super awkward for you.
If you have had any decent training, you’ve certainly heard all the super-trendy business jargon like “core competency”, “low-hanging fruit”, and my personal favorite, “opening the kimono” (yes, I cringed writing that). But, one you need to give some serious consideration: “staying at 30,000 feet”.
The most successful CEOs, Entrepreneurs, Investors, #BossBabes, etc. ingrain this Career-Exploding Life Hack into their core from the beginning. Staying at 30,000 feet means focusing on growing (and staying above any detail-work that you can have someone else do).
In our business, the growing is in the relationship building, and the details are called transaction coordination.
But, but, but I’m just starting out! I can’t afford to hire anyone yet! I haven’t even inked my first deal!! I’m super offended and want you to go away now!
Question: How much is your time worth? Let’s pretend you have the most common financial goal of new real-estate agents (make $100k your first year). In that case, your time is worth $48.08/hour. The average amount of time a new agent spends on the contract-to-close part of a transaction is 8 hours. (That drops to just over 6 hours as you gain more experience).
That’s an entire day that you don’t grow. A whole day that relationships aren’t being nurtured, new people aren’t being met, properties aren’t being shown, and (gasp!) networking happy hours are not being attended. Shameful!
Keystone Independent was founded to turn Realtors in Rockstars and it starts with sending you back up to 30,000 feet where you belong. I hear they have a nice happy hour up there.
Thanks for visiting. -jessie
Imagine a highly-experienced, detail-obsessed, devoted-to-please Realtor with ONLY ONE goal: Make OTHER Realtors more successful than they ever dreamed of. #ILoveRealtors #EveryoneNeedsAJessie #DetailsDetails #OneMinutePhonecall #TwoHoursSaved
Posted by Keystone Independent on Monday, August 28, 2017
What is a Triple Net (NNN) Lease?
A triple net (NNN) lease is defined as a lease structure where the tenant is responsible for paying all operating expenses associated with a property. Notice the underlined word there! The triple net or NNN lease is considered a “turnkey” investment since the landlord is not responsible for paying any operating expenses. With that said, in order to fully understand the NNN lease you must first understand the spectrum of commercial real estate leases. We’ll get to what is and what is not an operating expense in a bit.
The Range of Commercial Real Estate Leases
All commercial real estate leases fall somewhere along a spectrum with absolute net leases on one side and absolute gross leases on the other end. Most leases fall somewhere in the middle and are considered to be more of a hybrid lease, but no one but us language geeks actually call them that.
It’s just as hard as I thought it would be to NOT type “absolutely gross”.
When most people talk about a triple net or NNN lease, they are usually thinking about an absolute net lease. However, just because a lease is called or labelled an NNN lease, does not mean it’s actually an absolute net lease. Often a lease will be called a “triple net lease” for convenience when in fact it is not.
For example, in a new building, the tenant may indeed be responsible for replacing things like the plumbing system or roof as they wear out over time. However, on older buildings a lease can often be called triple net, but actually require the landlord to fund these capital expenditures over time, rather than the tenant.
The easy hack to keeping it straight? READ THE LEASE. Labels like triple net, full service, or modified gross, which are (mis) used all the time, often conflict with the actual terms of the lease. So READ it!
Triple Net Lease Investment Risks
Thought NNNs are almost risk-free? Nope! While triple net investments offer their advantages, there are still several risks that you need to consider. The main advantages of triple net lease investments are that you get a predictable revenue stream from the long-term leases and you also get a relatively hassle-free investment due to the lower management requirements.
And with these advantages come the risks. First, because most triple net lease investments are single-tenant, credit risk becomes important. For example, not many today doubt the strength of a triple net Walgreens investment since the lease is guaranteed by the publicly-traded parent company. On the other hand, it is very possible for financially strong and publicly traded tenant to fall out of favor over the term of the lease and ultimately go bankrupt (You mean Blockbuster Video is really gone forever??). Since single tenant triple net properties are either 0% vacant or 100% vacant, you need to consider that risk while I unfold my map and find a Toys-R-Us. Maybe they’re in the phone book? I’ll just call 4-1-1.
Another risk to consider is the risk of re-leasing. Many triple net investment properties are sold towards the end of a longer-term lease, shifting the risk of re-leasing the property to the new owner. If the new owner does not have this skillset or a strong team to handle this, then this could present considerable tenant rollover risk, so obviously this is something you need to point out to your potential buyer/investor client.
Here’s a really basic example of a proforma for a property with an absolute gross lease:
The above proforma includes no expense reimbursements from the tenant. In other words, the landlord pays all of the expenses for the property. Now, let’s take a look at how the proforma changes when the tenant reimburses the landlord for all of the property’s expenses:
The second proforma has a triple net lease in place that provides additional reimbursement income and cancels out all of the operating expenses. To be fair, a triple net lease rate will typically be significantly lower than an equivalent gross lease rate for the same property, which would make the bottom line cash flows under a gross lease and a net lease much closer together than in the above example. This is really just to demonstrate how this works.
The NNN lease ultimately gets the responsibility, and therefore the risk, of paying the operating expenses from the landlord to the tenant. For example, if property taxes skyrocket one year, then the landlord’s bottom line cash flow will be protected under an NNN lease and the tenant will be the one on the hook for hike.
You’re all geniuses now. Happy selling!
You’ve made that call before. That call to the homeowner that just listed his house without the help of a Realtor and he’s already angry because you’re the 1,678th agent that’s called him today?? You KNOW he needs your help and he’s totally setting himself up for failure, or worse… a lawsuit, but he doesn’t want to hear it. He. Ain’t. Havin’ it.
You think, “But, I live in his neighborhood, I should have an advantage, I really just want to help him! I’d even give him a discount!” (PROTIP: Don’t do that. You make less money when you do that.) “There has GOT to be a way to get through to him…”
1. Give him something USEFUL that won't be thrown in the garbage.
NOT a business card, an advertisement showing how awesome you are, or even a cool giveaway with your logo on it. NOTHING about you. Remember, your still an annoying agent to him at this point so it’s gotta be about him.
A hardcover book about how to spruce up your home before you sell, or how to sell your property for more money will do the trick. Leave it in his mailbox with a sticky note that says you’re his neighbor and you’re here to help if he finds out he needs it. See, people don’t throw away books. They may tuck it away somewhere, but they’ll certainly hang on to it 1,000 times longer than your (totally rad) koozie. (Another PROTIP: It’s not rad.)
2. Snap a picture of the house and call your Keystone Rep.
They’ll work up a custom flyer as if it was already your listing, along with a CMA and all property data available online. The week after, leave the flyers and info package in his mailbox with a note that says “Here’s some data that may help you, and you’re free to use these flyers if you want”. And, yes, you can include a business card now.
3. Update your comps.
Even if there aren’t any. The following week, have Keystone refresh your CMA and then you can deliver it with a note like “No new comps this week, but I’m always checking. I’m out here if you’d like some help, let me know.”
4. Have confidence that if he calls any agent, it will be you.
Be the only person that starts working for him with no expectation of anything in return. That’s called “Helping”. You know, that thing you said you wanted to do for him?? That’s how you do it.