There are several types of commercial real estate leases, one of the most common being a triple net lease (NNN). With a triple net lease, the tenant agrees to pay all expenses on a property — including real estate taxes, property insurance, and operating expenses — along with the cost of rent and utilities. This means tenants are responsible for any repairs and maintenance, including trash removal, landscaping, parking lot maintenance, property management, etc. This means the landlord is off the hook for any expenses related to the property.
What is a triple net lease?
Generally speaking, there are two types of leases — gross and net. With a gross lease, a tenant pays a flat fee for use of the property, and the landlord is responsible for any operating expenses. On the other hand, a net lease requires tenants to not only pay rent but also to pay some or all of the property’s operating expenses.
Triple nets leases are calculated by projecting the total amount of expenses for the year, dividing that number by the total rentable square footage of the building and then dividing that by 12, according to Coastline Equity Property Management. This results in a monthly dollar-per-square-foot amount the tenant is charged. When a tenant pays a triple net lease, they typically pay with one check that is broken into two parts — the base rent portion and the NNN portion, according to Janover Commercial Real Estate Loans.
Net leases typically fall into three main categories, single net lease (N), double net lease (NN) or triple net lease (NNN), depending on what tenants are required to pay along with base rent and utilities. Think of it like this — each “N” or “Net” stands for either property taxes, operating expenses or insurance fees.
- Single net lease (N): Tenants pay one of the three expense categories.
- Double net lease (NN): Tenants pay two expense categories.
- Triple net lease (NNN): Tenant pays all three expense categories. The most common type of net lease.
Most often, a triple net lease is used when a single tenant rents all, or a large portion of, an entire property, most often a retail property or office building. These leases are usually long-term, lasting 10 years or more. With a triple-net lease, tenants are able to have more control over a property, customizing the space as they wish, while also usually paying a lower rent. Landlords receive a low-risk, reliable source of income with little overhead costs. In fact, it's common for commercial real estate investors to use NNN investment properties as a source of passive income.
Pros of triple net leases
Here are the benefits — for both landlords and tenants — of a triple net lease.
- Control: As mentioned above, tenants who sign a triple net lease have the freedom to control the maintenance and appearance of the property. They also have direct control over utility costs, like electricity or water, and can choose the insurance carrier they prefer.
- Lower monthly rent: Tenants can leverage the additional expenses they’re responsible for to lower rent.
- Low overhead costs: Landlords aren’t responsible for repairs, upkeep, taxes, insurance, etc. on a property, meaning overhead costs are low. Additionally, if any substantial damage to the property occurs, the tenant will pay — not the landlord. And since triple net leases offer long-term occupancy, it removes the risk of a vacancy between tenants.
- Passive management: Landlords receive a consistent stream of revenue with limited involvement or management of the property.
Cons of triple net leases
Here are the drawbacks — for both landlords and tenants — of a triple net lease.
- Risk of the unknown: Taking on the risk of the unknown is a huge drawback for tenants. If any significant damage occurs during a natural disaster, for example, or a machine failure requires extensive repairs, the tenant is responsible for the costly expenses.
- Vacancy costs: The landlord will receive no rental income if they fail to secure tenants and the property remains vacant. Finding appropriate tenants may prove challenging.
- Earnings cap: Landlords can only charge the amount agreed upon in the lease, capping how much you can earn, even if the market fluctuates. "Changing property value cannot be accounted for immediately, and that can cap how much you can earn,"according to RentPrep.
