Triple Net Lease

What Is a NNN (Triple Net Lease)?

A triple net lease (also known as a NNN lease) is a lease agreement in which the tenant or lessee agrees to cover all of the property's expenses, such as real estate taxes, building insurance, and upkeep. These costs are in addition to your rent and utility bills. In ordinary commercial lease arrangements, however, the landlord is usually responsible for some or all of these payments.

Commercial property net leases come in a variety of forms, including NNNs. In a single net lease, tenants must pay property taxes in addition to rent, while a double net lease usually includes property insurance.

Important Takeaways

• A triple net lease (NNN) requires the tenant to pay all property expenses, including real estate taxes, building insurance, and maintenance, in addition to the rent and utilities.

• In commercial real estate, triple net leases are prevalent.

• Because the tenant assumes ongoing expenses that would otherwise be the property owner's responsibility, triple net leases typically offer lower rents.

• A single net lease, in which the tenant pays property taxes, and a double net lease, which includes both property taxes and property insurance, are two further types of net leases.

• Because they provide low-risk, consistent income, triple net leased properties have become attractive investment vehicles.

Triple Net Leases: An Overview (NNN)

A net lease is a commercial real estate lease in which the tenant is responsible for paying a portion or all of the property's taxes, fees, and maintenance costs.

If a property owner uses a triple net lease to lease a building to a business, the tenant is liable for the building's property taxes, insurance, and any maintenance or repairs the facility may require for the duration of the lease. The rent charged under a triple net lease is often cheaper than the rent charged in a regular lease agreement because the tenant is absorbing these costs that would otherwise be the responsibility of the property owner. The creditworthiness of the tenant determines the capitalization rate, which is used to calculate the lease amount.

Other Net Leases

Triple net leases NNNs are just one type of commercial net lease.

In commercial real estate, double net (NN) leases are also frequent. In a lease like this, the renter only has to pay two duties instead of three: property taxes and insurance payments on top of the rent. Because of the additional expenses, the renter must endure, the base rent—the rent paid for the space itself—is usually lower. All maintenance expenditures, on the other hand, are the landlord's responsibility and are paid directly by him.

Single net (N) leases aren't as frequent as they formerly were. In this case, the landlord passes only a little amount of risk to the renter, who is only responsible for paying the property taxes.

Check out this Northern Michigan Commerical Real Estate video

Particular Points to Consider

Triple net leased properties have become popular investment vehicles for commercial real estate investors looking for a consistent stream of income with minimal risk. A portfolio of three or more high-grade commercial properties fully leased by a single tenant with existing in-place cash flow is known as a triple net lease investment. Office buildings, shopping malls, industrial parks, and free-standing structures managed by banks, pharmacies, and restaurant franchises are examples of commercial properties. The normal lease length is 10 to 15 years, with rent increase built into the contract.

Long-term, stable income with the possibility of capital appreciation of the underlying property are among the advantages for investors. Vacancies, improvement expenditures, and leasing fees are not a concern for investors when investing in high-quality real estate. When the underlying properties are sold, investors can use a 1031 tax-deferred exchange to invest in another triple-net-lease property without paying taxes.

Investors in triple net lease investment offers must have at least $1 million in net worth (excluding the value of their principal residence) and $200,000 in income ($300,000 for joint filers). Smaller investors can participate in triple net lease real estate by purchasing shares in real estate investment trusts (REITs) that specialize in such assets.

Is it a Good Idea to Have a Triple Net Lease?

Triple net leases have advantages for both renters and landlords. A tenant has more flexibility with their structure; they can personalize their area for more brand consistency without having to spend the money on a purchase. Another benefit is that these leases are usually fairly flexible: tax rises, insurance increases, and so on. Triple net leases can be a solid source of income for landlords with little overhead expenditures. In addition, the landlord is not required to participate actively in the property's management.

Is it Possible to Negotiate a Triple Net Lease?

Almost all responsibility lie on the tenant under a triple net lease. The tenant is responsible for paying rent as well as all of the property's overhead costs, such as taxes, insurance, running expenses, and utilities. As a result, the base rental rate may become a crucial negotiating point. Because the tenant is shouldering the burden of the landlord's overhead, they may be able to negotiate a lower basic rental rate. Tenants can also discuss which components of repair costs and/or utilities the landlord is accountable for in some situations.

Is it necessary for me to be concerned about meeting my net lease obligations on the apartment I rent?

Most likely not. The most typical application of net leases is in commercial real estate, not in residential units. Residential tenants may be forced to pay for some or all of their utilities, and they are frequently encouraged to acquire renter's insurance on their own. A residential landlord, on the other hand, is usually responsible for the property's maintenance, liability insurance, and real estate taxes.

What is the formula for calculating a triple net lease?

The amount of a triple net lease can be determined in a variety of ways. Landlords may sometimes tally up all of a building's property taxes, insurance, maintenance costs, and common area costs and divide the amount by 12. The monthly cost is represented by this number. When a building is leased by only one tenant, the process is simpler. Typically, the monthly base rental cost is computed using a rate per square foot.

In a triple net lease, what is the landlord's responsibility?

With a triple net lease, the tenant is responsible for the majority of the costs associated with the commercial property. The roof and structure, as well as the parking lot, may be the landlord's responsibility.

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