Triple Net Lease (NNN) Meaning, Examples, Pros & Cons

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One of the essential real estate concepts that investors need to know is the lease structure. Many people know about residential leases. However, commercial property leases are entirely different.

When it comes to commercial real estate, a popular type of lease is the triple net lease. This applies especially for properties with single tenants. The following is an overview of the different kinds of leases that commercial tenants may sign and the information that investors should become familiar with when it comes to triple net leases.

What is a Triple Net Lease?

A triple net lease (triple-net or NNN) is a type of lease on a commercial property where the tenant agrees to pay fees associated with the building that go beyond the monthly rent and utilities. With a triple net lease, tenants are agreeing to pay:

• Property taxes.
• Building insurance.
• Maintenance and repair fees.

Typically, this type of lease agreement will come at a lower price for a tenant since they’ll be responsible for paying these additional costs. Other types of commercial net leases require tenants to pay for various expenses associated with the building. However, even if the expenses eventually become the tenant’s responsibility, a lot of landlords prefer payment to pass through them so they can ensure expenses are being paid.

Understanding Commercial Real Estate Leases

There are two fundamental types of commercial real estate leases: gross leases and net leases. The expenses that tenants are expected to pay is the main difference between the two. Here are some details that can give you a better understanding of these leases and their differences:

What is a gross lease?

A gross lease  requires the tenant to pay a rental rate previously agreed upon with the landlord. This rate depends on the property and its square footage. Aside from this, the tenant may be responsible for paying utilities.

Many Americans are likely familiar with the gross lease because these leases are used by residential landlords when renting houses and apartments to tenants. They are also common in other types of consumer-facing real estate, such as hotel rooms and self-storage units.

What is a net lease?

A net lease is one that shifts specific financial obligations over to the tenant. The amount that the tenant pays will depend on the kind of net lease, but financial responsibilities may include insurance, utilities, taxes, and ongoing expenses.

Net Lease vs. Single Net Lease vs. Double Net Lease vs. Triple Net Lease

Let’s look at the differences between the types of net leases you might encounter as a commercial real estate investor:

Absolute net lease

With an absolute net lease, each tenant is responsible for taking care of every payment possible, including major repairs that might occur. There may be some limitations related to maintenance, but the tenant will need to cover the majority of repairs.

For example, a building experiences structural issues because it is old. Under the triple net lease, the landlord should be responsible for this. But if it is under the absolute net lease, the tenant is the one who will be responsible for fixing it.

Absolute net leases are not common. What often occurs in properties for multiple tenants, like office buildings and shopping malls, are double net leases.

Single net lease

Aside from utilities and rent, when it comes to the payment of the property taxes of the building, tenants are the ones who should be responsible for it if they have a single net lease. It’s not very common to encounter single net leases.

Double net lease

Aside from utilities and rent, when it comes to the payment of the property taxes and insurance, tenants are the ones who should be responsible for it under a double net lease. This is a more common type of lease, but it’s still not the main type landlords use.

Triple net lease

Aside from utilities and rent, when it comes to the payment of property taxes, insurance for the building, and most of the common area and structural maintenance expenses, tenants are the ones who should be responsible for it if they have a triple net lease.

The most common of these four lease types  is the triple net lease. Because of this, the terms  “net lease” and “triple net lease” are usually used interchangeably.

Generally, triple net leases have initial terms that are longer than other leases. It’s not uncommon for the triple net lease to come with an initial term that is more than 10 years, with options allowing the tenant to extend. Often, they have gradual rent increases that are built into the lease agreement as well. These are what they call “escalators.”

When Are Triple Net Leases Used?

People may use the triple net lease for any kind of commercial real estate, but they are highly practical for freestanding or single-tenant properties. A triple net lease could end up being a logistical nightmare if maintenance and insurance expenses are split among numerous tenants.

Triple net leases are commonly seen on retail properties that are freestanding, such as clubs, warehouses, and convenience stores like Walgreens, McDonald’s, Costco, or large industrial warehouses. They’re also common on bigger single-tenant properties, such as industrial spaces and medical offices.

How do triple net leases benefit landlords?

Landlords may want to use the triple net lease to shift their variable costs away from them and transfer them to the tenant.

Here’s an example:

Let’s say you own a single-family home that you rent out to tenants, and your property taxes increased by $500. You will have to pay that increase.

However, if you purchase a building and have it leased to another business on a triple net basis, every cost will be the responsibility of the tenant. Therefore, an increase in taxes would not affect your cash flow.

Aside from that, the nature of the triple net lease in the long-term can lessen leasing and vacancy risk. Plus, nowadays, there is steady growth in the income stream of built-in escalators in rent.

Basically, a triple net lease allows the landlord to minimize risk. Tenants lock in for a long time, which keeps landlord expenses predictable.

But use of a triple net lease isn’t entirely without risk. One example is maintenance. It is still the responsibility of the landlord to have this done in a timely manner. Property owners often do this so they can protect their investment. Tenants, on the other hand, are not that interested in spending cash on routine maintenance.

How do triple net leases benefit tenants?

It may appear that triple net leases could only be advantageous to the landlord. However, they often require lower base rent payments compared to gross leases. It can also be viable for a tenant, as they agree to a long lease and to take care of the risk of any variables like maintenance costs, insurance, and taxes. Even after they factor out the added responsibilities in cost, tenants often have a better deal.

Most of the time, a triple net lease has an initial rental rate that is favorable. It also has an escalator that generally increases rental rates at a slower pace than the rental market. Historically, there is an annual 3% to 4% increase in the annual rate of a commercial lease.

Aside from this, it is common for annual rent escalators to increase by 1% to 2%. Because of this, commercial leases often have a cost structure that is favorable, and tenants are aware of what they need to pay in rent yearly for the whole term.

Pros and Cons of Triple Net Leases

Triple net leases on commercial property come with their pros and cons. Knowing the benefits and downsides to these leases can help you decide if you want to offer this type of commercial lease on your property. First, we’ll go over the pros of triple net leases:

• Less involvement: A landlord who has a commercial property with a NNN lease won’t have to do much for the property. This means they can just sit back and collect the rent.
• Longer occupancy: Tenants who sign triple net leases are typically interested in occupying a property long term. This reduces turnover, making a landlord’s expenses minimal.
• Reliable income: Because NNN tenants plan to stay in your property for a long time, you can count on a set income from the property that remains steady. With rent escalators built into the agreement, you can estimate your income for years to come.
• Avoid expense increases: Landlords with triple net leases won’t have to worry about expense increases, such as a raise in property taxes or insurance premiums, as these are the responsibility of the tenant.

The cons of triple net leases include:

• Limited opportunity for making more money: A triple net lease locks in the rent for your tenant for several years, so the ability to make more money is basically nonexistent with a NNN.
• Can be challenging to lease the space to another tenant: Tenants who opt for a triple net lease may do so because they need to change the building to meet their needs. This could make it more difficult to rent the space to another tenant at a later date.
• Risk of damages to property increases: When you have a triple net lease, you don’t have to check on the building or make repairs. Unfortunately, some tenants may not make the effort to keep your property in a condition that’s acceptable to you, letting damages build up until they’re very costly.

Example of a Triple Net Lease

To illustrate a triple net lease, let’s take a look at an example of what might be included in one:

Base rent	$1,000,000
Recoverable expenses from tenant	$150,000
Operating expenses	$420,000
Property taxes	$60,000
Insurance	$25,000
Total annual rent	$1,655,000
Monthly payment	$137,917

Are Triple Net Leases Good or Bad?

Triple net leases can be beneficial to both the tenant and the landlord. For those reasons, it’s not surprising that it is a common lease structure. Tenants benefit because they have more freedom with using the property and landlords won’t have to be as involved with the property ownership as they would with a single-family home or other type of property lease.

Of course, a triple net lease can be a nightmare if you have the wrong tenant. Since you’re expecting the tenant to take care of any issues with the building, if they fail to do so, you may not realize it until the issues become major. This could end up costing you a lot of money when the tenant leaves or you discover the problems.

How Do You Calculate a Triple Net Lease?

If you’re considering signing a triple net lease with a tenant, you need to know how to calculate their monthly rent, including ongoing expenses. To do this, you need to first know the rental rate per square foot. Multiply the square footage by the rate you charge per square foot to get the yearly rent amount.

Next, you can add the yearly cost of taxes and insurance to the yearly rent amount. Then, you need to calculate the estimated costs to maintain the building annually. Add this amount to your number for rent, taxes, and insurance to get your annual rent. The last step is to divide the number by 12 to determine what your tenant will pay you each month.

Bottom Line

Triple net leases can be great for landlords and tenants, but they have their downsides too. Make sure to do your research and calculate your numbers before you sign a triple net lease. It’s also important to vet your potential renter well before signing the lease. If they’ve had issues renting in the past, you may want to forgo a triple net lease.

Now that you’re aware of the ways the triple net lease works, you can be confident when analyzing any triple net property you would like to invest in.

Do you have any questions about lease types that were not addressed above?

Ask me in the comment section below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.