YOUNGSTOWN, Ohio – Triple net lease commercial and industrial properties are growing in popularity among investors, drawing buyers here from across the country, local real estate professionals say.
A triple net lease is an agreement in which a property’s tenant is responsible for maintenance, real estate taxes and building insurance.
Under such terms, monthly rent might be lower than if the property owner would be responsible for those costs.
James Grantz, broker associate with Edward J. Lewis Inc., Youngstown, cites the $1.7 million sale he brokered of a triple net lease warehouse on Heck Road in the Columbiana Industrial Park. The warehouse, operated by Hemasource, a dialysis supply company, was sold May 26 to IRG Realty Advisors of Richfield.
“They’ve always been something that there’s a demand for,” Grantz says of triple net lease property sales. “There are constantly folks looking for good investments.”
Single net leases, in which the tenant agrees to pay one of the three primary expenses in addition to the base rent, remain more common but triple net leases are becoming increasingly popular, says Lisa Resnick, a real estate agent with Burgan-Friedkin Commercial Group, Liberty Township. They tend to be in areas where there is a high volume of commercial activity, she adds.
“I’m seeing them across the Valley,” Resnick says.
Double net leases, in which the tenant agrees to pay two of the three primary expenses associated with the property, are less common, she says.
Triple net leases, which are more prominent in major markets such as Pittsburgh, Cleveland and Columbus, are beginning to grow in middle markets because they are advantageous to both property owner and tenant, says Donald Thomas, managing partner of Platz Realty Group, Canfield.
“Here we’re probably a year or two behind,” he says. “I expect them to become more prevalent in the next couple of years.”
Most AAA-rated national companies normally work under a triple net lease environment, Thomas says. Locally, most banks, large retailers and large warehouse spaces operate under triple net lease deals, Thomas says.
Such properties are “extremely attractive” to investors, he remarks. They get “all the benefit of equity and appreciation with the property” with none of the maintenance costs and other downsides.
“If you’re a passive investor, and you have money to invest in a portfolio position and you don’t know anything about property management and maintenance, this is an ideal way to get into the market,” Thomas says.
“It’s such a great opportunity when you’re looking at acquisitions on an investor level, to be able to put money into the real estate market without that much responsibility,” adds Burgan-Friedkin’s Resnick.
Tenants like leasing such properties because the terms are more transparent and the leases tend to be longer term, 10 to 20 years, according to Resnick.
Tenants of such properties also tend to be more secure and credentialed, making them attractive to the property owners.
“That’s why probably they’re more and more popular,” she says.
“They definitely lean more toward the benefit of the building owner, but at the end of the day it’s lower risk on both sides,” Resnick says. Additionally, profits from a triple net lease can be transferred into another building though a 1031 exchange to defer recognition of tax liability, “which is beneficial for you as an investor.”
One of the tenant advantages is if the decision is made to leave the market, that tenant doesn’t have the liability of building ownership. “They have a liability on the lease side, but at some point that will expire,” Thomas says.
Finding a buyer for such properties generally isn’t difficult, Grantz says. They offer a guaranteed rate of return for a specific period of time, making them attractive to investors. Sometimes the lease is based on a building, while other times it’s a ground lease.
“Over the years I’ve been involved with several ground leases that get sold, and buyers are attracted to the lack of risk,” he says. “Traditionally, you can get a lot more money with this type of investment than just putting money in the bank.”
Bob Collins, a commercial real estate agent with Berkshire Hathaway HomeServices The Preferred Realty in Hermitage, Pa., sees some triple net lease situations in his market, mostly involving larger stores that lease in plazas. A lot of the deals he is involved with are for lease price plus utilities.
“It just makes it easier if it is a smaller office or a smaller retail space to do a flat lease,” he says. In many cases, the owner is someone “who owns a small strip plaza or office complex. He’s got another business or job and he tries to keep it simple.”
Platz’s Thomas agrees. “Typical mom-and-pop, small footprint locations and single owner locations are all pretty much gross leases,” he says.
Though there are some triple net leases in the office segment, they’re not as prevalent as in other categories, Resnick says.
“You definitely see them a lot when it comes to the retail/commercial side of things,” including restaurants, she says.
Such leases typically involve drugstores or fast food businesses for single-tenant occupancies, Grantz says
“Over the years, I’ve sold many retail plazas,” most recently a plaza at Starr Centre Drive in Canfield, Grantz says. “Some folks like having risk spread across three, four or five tenants and others like the idea of just dealing with one tenant. There’s different investment vehicles for different desires.”
Grantz says tenants are graded, with the rate of return being lower if the risk is lower and higher if the tenant is riskier.
“With a Walgreens, you might get 4.5% return on your investment, but with a National Tire and Battery you might get 7%,” he says. “Something like a small retail plaza might be more like 9%.” In some cases, the tenant develops the real estate, signs the lease for the property and uses it as a vehicle to raise capital for further expansion.
“It’s always important to read through leases, making sure that things are spelled out in detail to eliminate any questions that come down the pipeline,” Resnick says. Triple net leases are more simple and straightforward because there is “no question of who’s supposed to be doing what.”
Tenants also need to recognize that the costs associated with a triple net lease – taxes, insurance and maintenance – are separate and in addition to the base rents. “While you can negotiate the base rent, the triple net is not negotiable,” she warns.
Pictured: This warehouse in Columbiana, now occupied by Hemasource, has a triple net lease that sold for $1.7 million.