If you have been looking at prospective commercial real estate investments, you've probably come across some listings advertising triple net properties. For many new real estate investors, this term can be confusing at best. However, triple net properties can be a good investment if you do it right. The name refers to the three additional costs — namely real estate tax, insurance, and maintenance. In a triple net property agreement, the tenant of the property pays those costs. Here's what you need to consider if you're thinking of investing in a property like this.
How Marketable Is The Property?
It's easy to fall into the trap of thinking that, since there's a tenant in the building, you don't have to worry about finding tenants or marketing the space. However, tenants don't stay forever. Eventually, the existing tenant may choose to move on to another property or purchase one of their own.
That's why you should never dismiss the importance of the marketability of the property. Evaluate the structure of the building first. A building with a particularly unique or industry-specific design is going to limit your new tenant options considerably compared to an open-concept or standard layout commercial structure.
You should also consider the location of the property. Is it going to be a high-visibility location? Many commercial property tenants are going to be looking for somewhere that is not only easy to access but also visible to potential customers and clients. If the one you're looking at is too far out of the main traffic areas, you may have a hard time finding future tenants.
What Is The Current Lease Term And Wording?
You also need to know the logistics of the current lease. If the tenant in the building is under a long-term lease, you have more security for your ongoing income stream. However, if the lease is due for renewal fairly soon, that could leave you without income on the property until you find a replacement.
In addition, you need to clarify the terminology of the existing lease. A true triple net lease should be an absolute lease. The tenant should be covering all of the associated costs aside from the mortgage, including the utilities, taxes, any association fees for the development, and all of the maintenance and insurance costs. Ask to see the lease before you make a decision on the property.
In addition, have the lease reviewed by a real estate attorney. That way, you can be certain that the lease is legally enforceable and there are no loopholes that you need to be aware of.Share