Triple Net Leases Steering Profitability of Commercial Real Estate
Entrepreneur Bill Asher has been involved in the start of over 25 companies spanning industries from entertainment to real estate. In the latter area, Bill Asher acquires commercial properties with high profit potential.
Investing in commercial real estate can be very lucrative compared to residential properties. Traditionally, the returns on commercial properties range from 6 to 12 percent, depending on factors like the type of property (industrial, office, hotel, retail, or multifamily), the state of the economy, and occupancy rates. Residential properties like single family homes, on the other hand, have lower returns ranging from 1 to 4 percent.
Part of the reason commercial real estate has higher returns is the nature of leases signed in commercial real estate. Businesses that rent commercial spaces (restaurants, bars, grocery stores, or even banks) typically want to maintain a look that is consistent with their brands. The lease structure that allows them to do this is a triple net lease (NNN).
A triple net lease is where the tenant agrees to pay rent as well as expenses associated with the property including taxes and insurance, as well as physical changes to the property and maintenance. Rather than the landlord having control over changes and maintenance, the tenant does. This gives them flexibility to customize their locations to achieve consistency with their brands.
Landlords allow this because it takes a big cost burden off their hands, enabling them to enjoy higher margins on their investments. Finally, business tenants sign longer-term leases than residential tenants, so that’s another plus.