Understand how triple net lease structure works in commercial real estate Austin for easy investment in commercial properties.
While investing in any real estate, a very crucial concept that every investor should know about is the leasing procedure. Most of us are aware of the residential real estate lease structure, but we may not know much about commercial leases.
Commercial real estate Austin lease are completely different from those of residential lease. When it comes to industrial properties , one of the popular types of the lease is triple net lease especially for properties with single tenants.
So before we get on to understand what exactly is a triple net lease, let’s have an overview about different types of leases that commercial tenants may sign and the information that investor needs to be familiar with when it comes to investing in industrial properties Austin.
There are two main categories of real estate leases:
- Gross leases
- Net leases
These two are mainly differentiated on the basis of the expenses that tenants are expected to pay.
What is a Gross Lease?
Under Gross lease, tenants are liable to pay the landlord a single flat fee for the use of the space. While the landlord agrees to pay for other expenses related to the property such as taxes, utilities and repairs. These are also very common among those consumer-facing leases like hotel rooms and self-storage units.
What is a Net Lease?
A Net lease is one that shifts financial obligations towards the tenant. The amount paid by the tenant will depend on the lease pattern. Apart from that, financial responsibilities like tax, utilities, insurance will also be included.
Net lease is further categorized into four main types of leases:
1. Absolute net lease
Under Absolute net lease, the tenant is responsible for all payments including all possible major repairs. There may be few limitations under the maintenance. For example, if the building undergoes structural repair, the tenant is responsible to take care of the charges.
2. Single net lease
Under a single net lease, the tenants are responsible for the payment of the property taxes of the building along with utilities.
3. Double net lease
Double net lease includes payment of building insurance apart from the property taxes and utilities.
4. Triple net lease
Under a triple net lease, the tenant is solely responsible for the payment of the property taxes, insurance of the building, as well as all common area and structural maintenance expenses.
It is not very common to find the absolute net lease or single net leases. The most common occurrence in the properties of multiple tenants like shopping malls or commercial buildings is a double net lease.
Generally, the triple net lease has initial terms that are long. It is not uncommon to have an initial term of more than 10 years, with options to extend in future. Along with this, they have a gradual rate increase which is known as “escalators”.
Triple net lease is commonly applied on retail properties like clubs, warehouses, stores, etc. These are also common for bigger single-tenant industrial properties.
In commercial real estate Austin triple net lease is generally applied on freestanding or single-tenant properties. But this same becomes a nightmare when the maintenance and insurance are shared among the multiple tenants.
How do Triple Net lease benefits the landlords?
When leasing any property through triple net lease, the landlords release themselves from all the variable costs related to the commercial property management and are transferred to the tenants. In short, all the costs associated with the property become the responsibility of the tenants.
Also, as the triple net lease is a long term leasing process, it reduces the chances of re-leasing, vacancy risks along with steady growth in cash flow through the escalator rent process. Thus it is more favorable to the landlord as the responsibility comprising for all charges except maintenance is taken care of by the tenant.
How do Triple net lease benefits the tenant?
Most of the benefits in triple net lease seem to be only in favor of the landlords but there are some deals that are in favor of the tenants. The most obvious benefit of a triple net lease for a tenant is the initial lower price term rate for the base lease.
Since the tenant agrees to a long lease and takes care of all the variable costs like maintenance, taxes, and insurance of the property, he gets to pay a much lower rent in a triple lease agreement than compared to a gross lease.
Additionally, the properties with low vacancy rate further benefit the tenant as the taxes, insurance, utility and maintenance cost are divided among the fellow tenants. This way the tenant pays only his part while still enjoys paying a lower monthly base rent.
Triple net lease basically is beneficial to both landlords as well as tenants making it one of the most common leasing structures in commercial real estate in Austin.
Now that you are aware of the term triple net lease and how it affects and benefits the tenants and landlords you can confidently indulge in investments associated with triple net lease structure.
And if still in doubt get in touch with a professional Texas real estate firm. They will not only help you in understanding different lease structures in detail but you can also use their tenant representation service where they take care of everything from site selections to tax negotiation, construction or even project management.
So all you have to do is relax and take care of your business.