What is a Triple Net Lease (NNN)
A triple net lease is a lease agreement that designates the lessee, which is the tenant, as being solely responsible for all the costs relating to the asset being leased, in addition to the rent fee applied under the lease. The structure of this type of lease requires the lessee to pay the net amount for three types of costs, including net real estate taxes on the leased asset, net building insurance and net common area maintenance.
This type of lease can also be referred to as a NNN (net-net-net) lease.
BREAKING DOWN Triple Net Lease (NNN)
If a property owner leases out a building to a business using a triple net lease, the tenant is responsible for paying the building's property taxes, building insurance and the cost of any maintenance or repairs the building may require during the term of the lease. Because the tenant is covering these costs, which would otherwise be the responsibility of the property owner, the rent charged in the triple net lease is generally lower than the rent charged in a standard lease agreement. The capitalization rate, which is used to calculate the lease amount, is determined by the credit worthiness of the tenant.
In commercial real estate, a net lease is a lease in which the tenant is required to pay a portion, or all, of the taxes, fees and maintenance costs for a property. A single net lease requires tenants to pay property taxes in addition to rent, and a double net lease typically tacks on property insurance.
Triple Net Lease Investing
Triple net leased properties have become popular investment vehicles for investors seeking steady income with relatively low risk. Triple net lease investments are typically offered as a portfolio of properties consisting of three or more high-grade commercial properties that are fully leased by a single tenant with existing in-place cash flow. The commercial properties could include office buildings, shopping malls, industrial parks or free-standing buildings operated by banks, pharmacies or restaurant chains. The typical lease term is for 10 to 15 years, with built-in contractual rent escalation.
The benefits for investors include long-term, stable income with the possibility of capital appreciation of the underlying property. Investors can invest in high-quality real estate without concern for management operations, including vacancy factors, tenant improvement costs or leasing fees. When the underlying properties are sold, investors can roll their capital into another triple-net-lease investment without paying taxes, through a 1031 tax-deferred exchange.
Investors in triple net lease investment offerings must be accredited, with a net worth of at least $1 million, excluding the value of their primary residence, or $200,000 of income ($300,000 for joint filers). Smaller investors may participate in triple net lease real estate by investing in real estate investment trusts (REITs) that focus on such properties in their portfolios.