Many invest in triple net leases because of their history of stability. And with the growth in many commercial sectors, investors are quickly buying NNN properties for sale.
But just because NNN properties are available, that doesn’t mean it is simple to find the right one, or understand the intricacies of this type of lease. This article will discuss the basics of triple net properties and the straightforward calculations to help you with your search for the right investment.
Understanding NNN
A triple net lease or NNN is a type of commercial real estate in which your tenants pay the base rental fee or “net rent amount” plus three other fees:
- Property Taxes
- Property Insurance
- Common Area Maintenance
These charges are lumped into one estimated rate for the year, but the actual costs will be reconciled at the end of the year. Your tenants will either be billed or credited based on the difference between the estimated and the actual expense.
An example of an advertised NNN lease should look something like this:
Lease Rate: $20.00/sq. ft. NNN (Estimated NNN = $3.25 / sq. ft.)
It means the base rental rate is $20.00/sq. ft. per year, and the property expenses (NNN), which include property taxes and insurance, are estimated to be $3.25 / sq. ft. per year. It’s worth noting that most property expenses can fluctuate each year, which could drive the costs higher or lower.
Calculating NNN Leases
Calculating the NNN lease may look complicated at first, but understanding the basics will help you understand how this type of lease works. Suppose you saw a landlord advertising the following:
Lease Rate: $30/sq. ft. NNN
Property: 2,000 sq. ft.
NNN: $5
What you need to do first is to calculate the base amount or the monthly rent. This can be done using the following formula:
Base amount = Rent per square foot x Square Footage
Using the current example, you have to multiply $30 by 2,000 square feet to get the annual base amount of $60,000. Dividing the yearly base amount by 12 months will give you $5,000 as the monthly base amount.
$60,000 (Annual base amount) = $30 (Rent per sq. ft) x 2000 sq. ft. (Square footage)
$5,000 (Monthly base amount) = 60,000 (Annual base amount)/ 12 months
As for the NNN or other expenses, the landlord advertised $5. You multiply $5 with the square footage (2,000 sq. ft.) to get an annual fee of $10,000. Divide this value by 12 months and you’ll get the monthly amount.
$5 (NNN) x 2000 sq. ft. (Square footage) = $10,000 (Annual yield)
$10,000 (Annual yield) / 12 months = $833 (Monthly yield)
After getting these values, simply add your monthly base amount and the monthly yield:
$5,000 (Monthly base amount) + $833 (Monthly yield) = $5,833
This means tenants are expected to pay a total of $5,833 in monthly rent for the property. They can use these calculations to compare multiple advertised rates and find which suits their current financial situation – so make sure you understand them as well!
It’s also worth noting that the NNN amount would be significantly lower in multiple commercial building spaces because you may split the expenses among your tenants and the square footage that they rent. Calculating the monthly rate should be the same.
Triple net leases are beneficial to both tenants and landlords. By knowing how the rates are calculated, your tenants can easily compare lease advertisements and make more informed decisions. In turn, you have a better chance of raising occupancy rates if your potential tenants know the value of what you offer.
Brisky Net Lease has extensive experience in NNN properties for sale, retail properties for sale, and helping clients navigate the national NNN investment landscape.