Fielding Investments Discusses Three Different Types of Leases and How They Affect Investors
When investors start looking into purchasing and renting out commercial real estate to tenants, they need always to be aware that what they see on the Internet is not always the whole story. Brian Fielding of Fielding Investments shares that oftentimes, investors will find a lease that is classified as “NET,” yet it is not specified whether the lease is a “N” lease, an “NN” lease or a “NNN” lease. In order to assist investors in making informed decisions, Brian Fielding is releasing this guide.
- Triple-Net Lease “NNN”
The triple-net lease is the most preferred among investors, as it places all of the burden for any and all sorts of problems with the building itself onto the tenant, not the investor(s). These types of leases are in great demand by non-operating investors, as all responsibility for structural damage, taxes, insurance, utilities and more is assumed by the tenant. In addition, the terms of these leases are oftentimes 15 years or more and are generally reserved for larger regional and national tenants. These types of tenants have the experience and knowledge to handle any and all problems that could arise during their time of tenancy, however the investor should be aware that at the conclusion of the lease, the property will be returned in good condition with “normal wear and tear” excluded. This will usually mean that there may be little life remaining for critical portions of the building such as the roof and HVAC systems. The investor should assume that he will have to spend significant money to refurbish and ready the property for a subsequent tenant.
- Double-Net Lease “NN”
While still common amongst non-operating investors, property investment advisor Brian Fielding of Fielding Investments shares that the burden for many structural and site maintenance responsibilities will fall to the investor. He recommends that those investing in such properties hire professionals to help establish a budget for capital and repair matters. The projection of such costs is difficult to project and can range greatly depending upon location, number of tenants and a variety of other factors. Investors who own NN and N leased properties and do not live close to the property should seek the retention of someone diligent to oversee the property to protect against tenant abuse and to insure preventative maintenance is done for critical systems. In this type of lease, tenants are responsible for paying certain costs that are defined within the underlying lease. Mr. Fielding recommends that the investor should retain professionals to help budget for operational and capital expenses and have an accountant help prepare a budget for both the expected and “surprise” costs he is likely to encounter from year to year. This budgeting process may also allow the investor to accrue for such expenses in reporting to the IRS.
- Single-Net Lease “N”
While not entirely descriptive of the lease conditions, the term Net suggests that the tenant has limited responsibilities in the maintenance of the structure and various elements of the property. This type of agreement is often most successful with experienced property owners who have the talents and knowledge to address a variety of issues that befall any property. Many N lease owners are either able and willing to do their own repair work or have access to both handymen and specialists who can oversee the maintenance of critical systems [i.e. roofing, HVAC, masonry] professionally.
- Gross Leases
It is not uncommon to find governmental agencies and other large entities seeking Gross or Modified Gross lease commitments. Landlords are expected to have access to services such as janitorial needs and garbage collection and provide for those needs as part of their lease obligations. Mr. Fielding recommends that this sort of business should be reserved for the more experienced investors since there is a great deal of management and oversight required of the landlord. Further, tenants who seek gross leases are often more demanding in nature, and expect the landlord to be available immediately for even the most minor of maintenance issues. A casual investor who plans to travel or enjoy activities away from his home/office will likely not be fully comfortable with leases of this sort.
For more information about any of these types of leases as well as for more information about commercial real estate investment, visit http://brianfielding.com.