Triple Net Retail, Double Net Lease Definitions
I have been getting quite a few calls lately from first time triple net commercial real estate investors and folks selling a net leased commercial property and considering a 1031 tax deferred exchange for the first time.
In this post I’ll review the basic types of commercial leases common to retail properties. I’ll do a 1031 exchange recap a bit later in another post.
Absolute Net Lease or Triple Net Absolute lease.
This is generally the preferred type of lease for an out of area owner mostly because there are no day to day landlord / owner obligations. The tenant is responsible for everything. The triple net absolute lease is common for single tenant, single parcel, national credit tenants such as 7 Eleven, Circle K, CVS, Walgreens, etc. Many or most of the QSRs out there are also triple net absolute.
The tenant direct pays insurance, property taxes, all maintenance, janitorial, utilities capital, expense reserves just as if it was their building and property. The rent is the net operating income (NOI) so you know how much you’re going to take to the bank. All the owner does is collect the rent and pay the mortgage.
The advantage to the tenant is that they can deduct the entire rent and expenses as operating expenses versus having to depreciate the improvements.
As is true with all legal documents concerning real estate, the devil is in the details so it’s always important to retain a real estate attorney familiar with and licensed in the state where the property is located.
Triple Net or NNN leases
Frankly, the absolute triple net lease is applicable only if it’s a single tenant property. There’s no way a multi-tenant property can be ‘management free’ as the landlord / owner bills back the pro rata share of expenses to the tenant and collects, hopefully. Plus, the owner is the mediator or arbitrator between tenants, which of course brings us to the triple net lease or commonly referred to as NNN lease.
Triple net leases in a multi-tenant retail center in theory require the tenants to reimburse all expenses. In reality, it’s not quite that simple. If you’re buying an existing retail center with leases already in place, it’s crucial that you, the buyer, and your attorney carefully review the in-place leases. Plus, get a tenant estopple from every tenant so they restate their understanding of the lease. Plus, if there are agreements or representations between seller/owner and tenant made outside of the lease, you’ll hopefully know about it. If you have trouble here, move on to something else.
Double Net or NN leases
Most of the above applies except that there is a significant category of expenses or potential expenses where the landlord is responsible. This is almost always roof and structure, but could also include parking lot or HVAC replacement, etc. Therefore, it’s important to read that lease.
NN or double net leases are very common. For example, you’ll run into them in the auto parts segment with Advanced Auto, AutoZone and O’Reilly’s. Dollar stores such as Family Dollar and older Dollar Generals are also double. The Dollar General new builds are all 15-year absolute net leases and make a very solid safe triple net absolute investment for an out of area owner.
Whether you’re selling commercial real estate in Santa Monica, California or Columbus, Ohio or anywhere in between, and are in the middle of a 1031 exchange and need to locate a replacement property, your options are many. With the right type of lease and right property you can go just about anywhere in the United States provided the replacement property fundamentals are good.
I would be happy to be your Columbus or Santa Monica commercial realtor and locate just the right replacement property anywhere in the country. Contact me, Scott Harris realtor at 310-473-4789 or 614-905-6614.