There are a few ways to consider the difference between triple-net (NNN) and double-net (NN) leases, and why a tenant might choose one over the other. Let’s start by defining a NNN lease – a lease in which the tenant agrees to be responsible for paying rent in addition to all of the operating expenses, including taxes, insurance, repairs and utilities. When any one of these items is covered by the landlord, the roof for example, it becomes a NN lease.
In a NNN lease, the tenant has control over all of the expenses. If a tenant is a large national chain, they can often negotiate more favorable vendor contracts, and may create uniformity across their brand, such as signage and roof configuration, at all of its locations. Cost is always an issue, but for the relative nominal difference in expense, a national brand often prefers to be in control of all aspects of a property.
Additionally, the more landlord friendly the lease (NNN), the lower the capitalization rate tends to be. From a retailer’s perspective, a cap rate is tied, more or less, to the tenant’s cost of capital, and ultimately shows up as their occupancy cost. By providing a more landlord friendly lease they can achieve upwards of a 100-basis-point reduction in the cap rate the property will ultimately achieve in a sale.
For example, if CVS is building a new corporate store the cost of the building itself is about $3.5 million. Additionally, as CVS tend to be in premium locations, the cost of the land is probably another $2 million, making the total investment $5.5 million.
Because CVS owns the store in this example, and their capital is not best utilized being tied up in real estate, they may decide to do a sale-leaseback. In putting together a lease they have two options, broadly speaking, NN or NNN.
If CVS does the sale-leaseback as a NN lease, it would sell for say, at a 5.50% cap, which sets the rent at a little over $300K per year. If CVS does it as a NNN lease, it may trade closer to a 5.00% cap making the rent around $275K per year. Said another way they stand to save around $25K per year, which on a 20+ year lease, really adds up.
It’s worth mentioning the above example still holds true even if CVS had a third party developer deliver a site to do a build-to-suit because the rent the developer negotiates with CVS is based on essentially the same math. More “N”s means lower rent, and an obvious factor in a tenant’s decision to choose NNN vs NN leases.
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