What Is a Triple Net Lease (NNN)?
A triple net lease (triple-net or NNN) is a lease agreement on a property whereby the tenant or lessee promises to pay all the expenses of the property, including real estate taxes, building insurance, and maintenance. These expenses are in addition to the cost of rent and utilities. In contrast, in standard commercial lease agreements, some or all of these payments are typically the responsibility of the landlord.
NNNs are just one type of commercial property net lease. A single net lease requires tenants to pay property taxes in addition to rent, and a double net lease typically tacks on property insurance.
- With a triple net lease (NNN), the tenant agrees to pay the property expenses such as real estate taxes, building insurance, and maintenance in addition to rent and utilities.
- Triple net leases are commonly found in commercial real estate.
- Triple net leases tend to have lower rents because the tenant assumes ongoing expenses that would otherwise be the responsibility of the property owner.
- Other net leases are a single net lease, in which the tenant pays property taxes, and a double net lease, which includes property taxes and property insurance.
- Triple net leased properties have become popular investment vehicles for investors because they provide low-risk, steady income.
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Understanding Triple Net Leases (NNN)
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.
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 for 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 ("cap rate") is the expected rate of return on a commercial property. The cap rate, which is used to calculate the lease amount, is often determined, in part, by the creditworthiness of the tenant.
Advantages and Disadvantages of Triple Net Leases
The main advantage of triple net leases for both tenants and landlords is that they are simple to understand and easy to manage since the tenant is responsible for all operating expenses, but they may present some inconveniences too.
Pros of Triple Net Leases
- The tenant has total control over the maintenance, upkeep, and appearance of the
- The tenants also have direct control over the costs they pay, such as electricity or water. They can also select the insurance carrier of their preference and can protest the taxes if necessary to keep them as low as possible.
- A triple net lease is a steady and consistent revenue stream.
- A triple net lease involves less management hassle since utility expenses, repair costs, taxes, and any property management costs and issues are the responsibilities of the tenant. This leaves the landlord more time to focus on their primary business.
Cons of Triple Net Leases
- The tenant assumes the risk of property tax and any increase in the price of insurance. They also assume any cost involved in maintaining the property.
- The landlord might overestimate the operating costs when determining the rental price, which results in the tenant overpaying for some of the costs.
- Tenants might invest some work and time in property management, from hiring repair companies to comparing and buying insurance and protesting taxes if needed.
- Some unexpected costs (in maintenance or tax liabilities, for example) may arise during the time of occupancy.
- Finding good and reliable tenants who are willing to sign a triple net lease could be a challenge. Another factor to consider is the downtime in between tenants, which could result in no rental income while the building is vacant.
- The tenant credit risk should be a concern for landlords. The tenant's financial strength and stability are key since they are responsible for operating expenses.
Triple Net Leases vs. Single Net Leases and Double Net Leases
Triple net leases NNNs are just one type of commercial net lease.
Single net (N) leases are not as common. Here, the landlord transfers a minimal amount of risk to the tenant, who pays just the property taxes.
Double net (NN) leases are also common in commercial real estate. In a lease like this, the tenant pays two instead of three obligations: property taxes and insurance premiums in addition to the rent. The base rent—payable for the space itself—is generally lower because of the additional expenses the tenant must bear. All maintenance costs, on the other hand, remain the responsibility of the landlord, who pays for them directly.
Investing in Triple Net Leases
Triple net leased properties have become popular investment vehicles for investors seeking steady income with relatively low risk. Triple net lease investments typically consist of a portfolio of three or more high-grade commercial properties 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.
Commercial property is real estate that is used for business activities or profit-generating purposes. It usually refers to buildings that house businesses, but can also refer to land used to generate a profit, as well as large residential rental properties.
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 management concerns like vacancies, 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 in 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.
Triple Net Lease Example
Below is a hypothetical example of a triple net lease:
|Recoverable expenses from tenant||$175,000|
|Total rent annually||$2,168,000|
Is a Triple Net Lease a Good Idea?
For both tenants and landlords, triple net leases can offer some benefits. A tenant has more freedom with their structure; they can customize their space for more brand uniformity without the capital investment of a purchase. Another advantage is that these leases tend to be quite flexible: caps on tax increases, insurance increases, etc. For the landlord, triple net leases can be a reliable source of income and have very few overhead costs. The landlord also does not have to play an active role in the management of the property.
Can You Negotiate a Triple Net Lease?
With a triple net lease, almost all responsibilities fall on the tenant. The tenant is responsible for paying rent, as well as all overhead costs associated with owning the property: taxes, insurance, operating expenses, utilities, etc. As a result, the base rental amount can become a key negotiating term. Because the tenant is taking on the risk of the landlord's overhead, they may be able to negotiate a more favorable base rental amount. Also, in some cases, tenants can negotiate what aspects of repair costs and/or utilities the landlord is responsible for.
Do I Have to Worry About Paying Net Lease Obligations on the Apartment I Rent?
Probably not. Net leases are most commonly used in commercial real estate and not for residential units. Residential tenants may be required to pay some or all of their utilities, and will often be encouraged to purchase their own renter's insurance. A residential landlord, however, would typically pay for the property and liability insurance and real estate taxes.
How Do You Calculate a Triple Net Lease?
There are various ways that the amount of a triple net lease can be calculated. Sometimes landlords will add up all the property taxes, insurance, maintenance expenses, and common area expenses for a building and divide the total by 12. This number is the monthly cost. This process is simplified when only one tenant is leasing a building. The monthly base rental amount is typically calculated based on a rate per square footage.
What Is the Landlord Responsible for in a Triple Net Lease?
The tenant is responsible for most expenses related to a commercial property with a triple net lease. However, the landlord may be responsible for the roof and the structure, and sometimes the parking lot.
The Bottom Line
A triple net lease can be a good option since this type of lease offer both landlords and tenants several advantages and can benefit both parties. While landlords can hand off paying various property expenses, enjoy a stable source of income, and are able to focus on their own business, tenants, on the other hand, can receive a lower monthly rent.
Nevertheless, landlords and tenants alike should explore other types of leases, including single net leases and double net leases
Internal Revenue Service. "Like-Kind Exchanges - Real Estate Tax Tips."