What are the three "nets" of an NNN lease?
A triple net (NNN) lease is a type of real estate lease in which the tenant is responsible for paying the building's property taxes, insurance and maintenance costs in addition to rent. These three additional costs represent the nets to which the name of the lease refers. Because the tenant, rather than the landlord, must cover these additional real estate costs, the rent in an NNN lease is almost always lower than the rent in a traditional lease.
In a traditional lease agreement, the landlord builds the estimated costs of property taxes, insurance and maintenance into the rent that he charges to his tenant. He then uses the rent money paid by his tenant to meet these expenses. For example, if the landlord knows that the market bears a rental cost of $12,000 per year for his property, and he estimates annual property taxes of $1,000, insurance costs of $1,500 and $2,000 for maintenance expenses, the rent that he charges the tenant in a traditional lease is $1,650 per month. The tenant is absolved from all financial responsibility, save for his rent, related to the building. The landlord pays the taxes and insurance, and, if the roof leaks or another maintenance issue arises, the tenant calls the landlord rather than paying for the repair himself.
With an NNN lease, using the above example, the landlord only charges the tenant $1,200 per year in rent. However, the tenant is responsible for the tax bill, the insurance bill and for taking care of maintenance in a timely manner. The lease agreement usually stipulates exactly how maintenance issues are to be handled. Because property taxes, insurance and maintenance are not fixed costs from year to year, an NNN lease shifts financial risk from the landlord to the tenant. If the government passes a huge tax hike, the insurance company raises rates or a host of repairs need to be made in a given year, the tenant incurs these expenses while the landlord's finances are unaffected.
Because of its inherent predictability in rental income and expenses, an NNN lease is considered a risk-averse investment for the landlord. However, it is not completely free from risk. The tenant's creditworthiness and the assignment of responsibility in the case of an unforeseen disaster, such as a hurricane or a fire, are two determinants of an NNN lease's risk level. Some landlords attempt to mitigate risk even further by drawing up what is known as a bondable or absolute NNN lease. This arrangement prohibits the tenant from terminating his lease or being granted rent concessions for any reason, even if property tax and insurance costs increase to unreasonable levels or he is faced with an interminable stream of maintenance issues.