A triple net lease is a lease agreement between a tenant and landlord, in which the tenant agrees to pay ongoing operating expenses for the property, including real estate taxes, insurance premiums, and routine maintenance and repairs. A triple net lease is also sometimes referred to as an absolute net lease, a net-net-net lease, or a NNN lease.
Here’s what you need to know before deciding whether a triple net lease is a good idea for your investment property.
What Is a Triple Net Lease?
A triple net lease is a commercial lease under which the tenant is responsible for all—or an agreed upon portion—of the property’s operating expenses, insurance, and taxes. The term net, in this case, refers to the fact that the tenant is responsible for these expenses, in addition to rent. Triple net leases are commonly used for industrial and retail properties, such as shopping centers and warehouses.
When Is a Triple Net Lease a Good Idea?
There are several reasons why a landlord might want to use a triple net lease. First, a NNN lease allows the landlord to pass on the cost of operating and maintaining the property to the tenant. This can be a significant cost saving for the landlord, particularly if the property is large or expensive to maintain.
NNN terms also translate into fewer headaches—if something breaks, the tenant is responsible for scheduling repairs instead of bothering the landlord (as is the case with a full-service lease).
Finally, triple net leases can provide the landlord with a greater degree of control over the property. The landlord can specify in the lease agreement how the tenant must maintain the property and what type of insurance coverage is required. This can help to ensure that the property is well-maintained and that it meets the landlord’s standards while leased.
Why Would a Tenant Agree to Triple Net Terms?
There are several reasons why a tenant might choose to sign a triple net lease. In some cases, the tenant may feel that they can control their own costs better than the landlord. Tenants may also appreciate that the base rental price is lower under triple net arrangement because they are taking on other costs associated with the property. This is especially true for newer commercial buildings where maintenance costs are relatively low.
Ultimately, landlords and tenants can negotiate the type and terms of a real estate lease, or a property owner can offer the property under strictly NNN terms. Landlords should carefully consider whether this type of lease agreement is right for their property before imposing it on a lessee.
How NNN Leases Work
Triple net leases are typically structured so that the tenant pays a base rent, plus an additional amount to cover the property’s operating expenses, insurance, and taxes. The base rent is usually a set amount, while the triple net charges can vary depending on the actual cost of operating and maintaining the property.
The specific terms of a triple net lease vary depending on the landlord and the property. For example, if a commercial building is rented to a single tenant, that tenant takes on all of the additional costs as part of their monthly payment. If, on the other hand, the property is leased to several tenants—each with their own space—the costs will be divided, with the cost of common areas split across the parties.
Triple net leases are generally more favorable to the landlord than traditional leases, since they shift most of the responsibility for operating and maintaining the property to the tenant.
What Is Included in a Triple Net Lease?
The terms of a triple net lease are established by the landlord and can vary by property. However, there are some common elements that are typically paid by the tenants under a NNN lease.
- Base rent amount and triple net charges. In general, triple net leases specify the base rent amount, as well as the amount of any triple net charges. NNN costs usually include maintenance and operating expenses like utilities, janitorial services, and repairs, as well as property tax payments. The lease should also specify how often rent is to be paid (usually monthly), and may include provisions for late payments or bounced checks.
- Insurance and maintenance requirements. NNN leases should specify what type of insurance coverage is required by the tenant. The landlord may also require the tenant to maintain the property in good condition and to make repairs as necessary, including common areas where there are multiple tenants.
- Limitations on business use. Where appropriate, a triple net lease may specify what type of business can be conducted on the property. For example, the landlord may not allow the tenant to operate a business that produces a loud noise or that emits offensive odors. Improvements to the interior and exterior of the property also may be limited or set forth within the lease agreement.
How to Calculate a Triple Net Lease
To calculate a triple net lease as a real estate investor, you will need to know the base rent amount and the triple net charges. You can then use the following formula:
NNN Charges Per Square Foot = Total Annual Costs / Total Property Square Footage
Total annual costs may include annual property taxes, property insurance, estimated maintenance costs, and any other expenses agreed upon in the lease document.
Then, calculate the total rent accordingly:
Total Rent = Annual Base Rent + (Annual NNN Charges x Rental Square Footage)
The best way for a potential tenant to determine the true cost of a triple net lease is to speak with a property manager or leasing agent who can estimate the monthly expenses, based on the specific property and market conditions.
Triple Net Lease Pros and Cons
Ultimately, whether or not a triple net lease is right for a particular landlord or property depends on the specific situation. Landlords should weigh the potential advantages and disadvantages carefully before deciding whether or not to use this type of lease agreement.
NNN Lease Pros
Some of the potential advantages of triple net leases include:
- Fewer landlord responsibilities. Choosing a triple net lease means fewer management responsibilities because maintenance costs and operating responsibilities fall to the tenant.
- Lower overhead and maintenance costs. Shifting the responsibility for operating and maintaining the property to the tenant saves the landlord money from month to month. A triple net arrangement can also insulate landlords from increases in overhead during the lease term.
- Increased control over the property. Choosing a NNN lease gives a landlord greater control over how the property is used and maintained—without having to manage any of it themselves. This is because all of the relevant management requirements are set forth in the lease agreement.
- Simplified leasing process. Triple net agreements have the potential to simplify the leasing process because all of the expenses are rolled into one payment.
- Easier to sell the property. Like other commercial leases, triple net leases are transferable and may be more appealing to potential buyers because of the increased convenience.
NNN Lease Cons
Potential disadvantages of triple net leases include:
- Lower cap rates. Capitalization—or cap—rates are typically lower with triple net leases. This is because they’re often used by large, creditworthy tenants and chosen by landlords for convenience rather than maximum profit.
- More difficult to find a tenant. Requiring tenants to pay for maintenance, taxes, and insurance requirements can make it difficult to find someone willing to accept a triple lease agreement.
- Often long-term tenants. Having a long term tenant in place can be a good thing, but it can limit income potential if you’re tied to a fixed rent. For this reason, NNN leases may be better for investors who want passive income than for value-add investors who want to maximize their yields over time.
- May be difficult to find a new tenant. NNN tenants usually build out the space to meet their unique needs, including floor plans, finishes, and even industry-specific fixtures like roll-up doors. This can make it difficult to appeal to a new tenant when the lease period ends—especially if extensive renovations will be required.
Triple Net Lease vs. Gross Lease
With a triple net lease, the tenant is responsible for paying all of the operating expenses in addition to the base rent amount. These operating expenses can include property taxes, insurance, and repairs and maintenance.
On the other hand, a gross lease—or full-service lease—requires that the landlord pay all of the operating expenses associated with the property. The tenant simply pays a single, fixed monthly rent amount. Some full-service leases are even more comprehensive and require landlords to be responsible for everything, down to changing light bulbs.
The best type of lease for a real estate developer depends on several factors. If you are looking for a simple lease agreement with predictable monthly expenses, then a gross lease may be a better option. On the other hand, if you are looking for more control over how the property is used and maintained, then a triple net lease may be a better fit.
No matter which type of lease you choose, always protect your rights and interests by having a real estate lawyer review the agreement before sending it to your tenant.
