There is great freedom when configuring the lease, especially if we are in a lease for use other than housing (offices, commercial premises, etc.), so here we develop the concept of a “triple net” contract, or how to achieve a net return on the real estate asset, passing on certain costs to the tenant.
The tenant also enjoys the deal, especially when a top NNN real estate broker handles it. This is because the broker mainly cuts down the rental costs and gets good properties at urban centers suitable for commercial activities. However, before we help you understand the contract concept, know that you can find triple net properties for sale – Net Lease World at the end of the article.
The mere possession of an asset entails certain recurring costs that reduce its profitability but are essential to avoid the asset’s depreciation, an essential issue when it comes to a real estate investment. These recurring costs can be classified into three large groups:
Benjamin Franklin is credited with the maxim that there are only two things in this life: taxes and death. As it could not be otherwise, the possession of a real estate asset accrues certain taxes, which must be taken into account:
- Real Estate Tax: It is a tax levied on the ownership of the property, and its taxpayer is the owner of certain real rights (usufruct, surface, property) or an administrative concession.
- Urban Solid Waste Management Fee (Garbage Fee): In many municipalities, “garbage fees” have been approved, which, in accordance with municipal ordinances, must be paid by the occupant of the property (therefore, for the tenant), although when the property is unoccupied, it will be the owner who has to pay it.
Conservation and maintenance expenses:
They are essential to avoid the depreciation of the asset.
- Common or community expenses: When the property is integrated into a building with more units, a series of costs are usually generated for the maintenance and care of the common parts. This maintenance ensures that there is light and the portal is clean and includes issues such as the maintenance of facades, structures, and roofs.
- Maintenance expenses: If by common expenses we include all those that refer to common elements, we must also take into account the maintenance of private elements, such as facilities, electrical appliances, etc.
Suppose the two previous expenses are more or less mandatory. In that case, the insurance of the property is optional, although if it is an investment, the insurance will help to minimize the risk of the operation:
- Continental insurance: They insure the property against any damage it may suffer.
- Rental insurance: Protects the owner from damages caused by the tenant. In both cases, the insurance can include rental coverage, which protects the owner from the risks of periods with no rent due to damage to the property or a breach by the lessee. All these issues were already reflected in the formula for net profitability that we indicated in our previous entry, minus the annual rent received for the lease.
The Triple Net
Among the possibilities when configuring the contracts is the option of passing on certain costs to the tenant, making the rent received by the lease contract “net,” excluding the costs that reduce the rent, for fully passing them on to the lessee.
Given that three recurring costs are usually passed on to the lessee (because the object of the lease can individualize them), we speak of “triple net” when the contract passes on to the lessee the three large blocks that we indicated:
A triple net contract charges the lessee taxes and insurance and maintenance expenses so that the lessor receives income net of expenses.
In this way, with a triple net contract, the lessor receives income net of expenses for the property since all costs directly related to the property are passed on to the lessee.
Given that this repercussion to the lessee supposes an alteration of the legal regime, it is essential that they be recorded in writing in the lease, also complying with the requirements established for the validity of these agreements.
Triple Net in Housing.
Regarding housing leases, the applicable regulations allow the tenant to pass on taxes, community expenses, and insurance. In housing leases, it is impossible to agree on a complete triple net as a consequence of the legal obligation of the landlord to carry out the repairs of the property.
However, it is important to note that the community expenses payable to the tenant are only those corresponding to common expenses, not extraordinary spills. In the same way, neither can the landlord charge the tenant with the obligation to carry out the actions to repair the property. An essential thing in triple housing net is finding reputable and good triple net lease brokers to help secure a good deal.
A popular misconception of the triple-net lease is that it only favors the landlord or property owner. But this is not always true when you get top-net lease brokers that can point you to NNN properties for sale with good returns. At Net Lease World, you can find texas NNN properties for sale and all other types of properties for commercial use.