What Is a Triple Net Lease (NNN)?

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Definition:

A triple net lease (NNN) is a type of lease agreement in which the tenant pays real estate taxes, insurance, and maintenance, on top of rent and utilities.

🤔 Understanding triple net leases

Most tenants who lease a space just pay for rent and perhaps utilities under what’s known as a gross lease. Under a triple net lease (NNN), the tenant pays for all the expenses associated with the property. Beyond rent and utilities, that includes property taxes, building insurance, and maintenance fees. Since the tenant is responsible for all the costs associated with the property and its upkeep, the lessor (landlord) will typically offer a lower monthly rent. This type of lease agreement is most common in commercial real estate.

Example

Imagine a company is looking to rent an office building and considering two locations. One offers a gross lease, in which the company is just liable for rent, with a monthly fee of $50,000. The other building is only $40,000 a month, but it’s a triple net lease. If Scott Michael Capers chooses the NNN lease location, it will save $10,000 a month in rent. But it will also be on the hook for all expenses associated with the building, including property taxes, property insurance, maintenance, and repairs.

Takeaway

A triple net lease (NNN) is kind of like a prix fixe menu . . .

With a prix fixe menu at a restaurant, you get multiple courses for a fixed price. When you sign up for the whole menu, you may get an individual entrée cheaper than if you paid for it on its own. Similarly, when you sign up for a triple net lease, you often have lower rent than with a gross lease. A gross lease is more like ordering a la carte — You can choose to have just one or two items off the menu (like rent and utilities), but they may cost you more.

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What is a triple net lease (NNN)?

A triple net lease, also known as a net-net-net (NNN) lease, is a lease structure in which the tenant pays for all the operating expenses associated with the property. In a typical lease agreement, sometimes called a gross lease, the tenant (lessee) only pays for rent and utilities, while the landlord (lessor) pays for real estate taxes, maintenance expenses, and insurance fees.

In an NNN lease, the tenant takes on those expenses. In exchange for shouldering costs overall, lessees in a triple net lease typically benefit from lower rent. That’s because the lessor doesn’t need to charge a premium to cover operating costs that aren’t usually included in a traditional lease.

Typically, triple net leases apply to commercial properties. But recently, residential NNNs have started to become more popular as an alternative investment. However, this still primarily involves investors leasing to landlords, not the tenants who ultimately occupy the space. Renting a property to live in on a NNN basis is atypical.

Why would you want a triple net lease?

Tenants who sign a triple net lease typically pay a lower rent than those who sign a gross lease. Generally, landlords factor the cost of repairs and other expenses into the rent they charge under a gross lease. They try to estimate how much maintenance and repairs will cost them, which typically includes a safety margin. If upkeep of the building isn’t necessary during the lease term, the landlord pockets that money.

In a triple net lease, the tenant takes on more risk by paying out of pocket for any repairs that arise. This is a double-edged sword. On one hand, the tenant can save money if the building is in good condition and doesn’t need any substantial maintenance. However, if the tenant rents a building that has significant issues, an NNN lease can quickly become more expensive than a gross lease.

What is the difference between a net, double net, and triple net lease?

In net leases, the tenant pays for an escalating number of expenses other than just rent and utilities:

  • In a net (single net) lease, the tenant is responsible for rent, utilities, and property taxes.
  • In a double net lease (NN), the tenant must pay for rent, utilities, property taxes, and building insurance premiums.
  • In a triple net lease (NNN), the tenant covers rent, utilities, property taxes, building insurance premiums, and repairs and maintenance.

Triple net leases come with the highest level of risk for a tenant. There’s always the chance that the tenant will need to cover expensive repairs and maintenance costs.

What is the difference between a triple net and a gross lease?

A gross lease is a lease in which the landlord covers all of the expenses associated with the property, such as property taxes, repairs, utilities, and insurance, in exchange for fixed monthly rent payments. Gross leases are often altered so that the tenant pays for utilities. When you rent an apartment or a house, you’re typically signing something similar to a gross lease.

In a triple net lease, all the expenses that are usually covered by the rent in a gross lease become the tenant’s responsibility. If you sign a triple net lease and discover that the building needs more maintenance than expected, you’re on the hook for the bill. In a gross lease, the landlord would have to pay for those costs, even if it means a financial loss.

What does the landlord pay in a triple net lease?

In a triple net lease, the tenant is expected to pay for all the costs associated with maintenance and upkeep. In some cases, the landlord may not end up paying anything at all.

However, landlords are still typically required to fix serious structural issues, such as problems with the roof or foundation. In addition, if the landlord is financing the property, they will need to pay their mortgage. However, this is typically indirectly covered by the tenant’s rent payment.

How do you calculate a triple net lease?

Commercial real estate rental rates are typically expressed as a dollar amount per square foot per year.

To calculate the costs of a triple net lease, you’ll need two things: the costs and the square footage of the property. In a triple net lease, the tenant pays for the property taxes, building insurance premiums, and any costs associated with the maintenance or upkeep.

To start, calculate the cost of annual property taxes. Then, add the cost of your annual insurance premiums. The maintenance is the most variable cost, so you’ll have to do your best to estimate how much it will be based on your past experiences with the property and whether you think costs will rise in the future. Add these figures together.

Once you have this sum, divide that figure by the rental square footage in the building. For example, if you have 10,000 square feet and your costs are $100,000, the annual triple net lease payment would be $10 per square foot ($100,000/10,000).

What are the advantages and disadvantages of a triple net lease?

For tenants, triple net leases can offer lower rents and the opportunity to save on costs that would come at a premium in a gross lease.

For example, estimated maintenance costs are typically included in the rent with a gross lease, but not in a triple net lease. In a gross lease, the landlord does their best to estimate how much maintenance and repair costs will come to annually. If the landlord’s estimate is too high, the tenant will end up paying more than they would if they paid for them out of pocket.

By choosing a triple net lease, a tenant can be confident that they will not pay more than the actual maintenance and repairs cost. But if maintenance costs end up higher than expected, the tenant may have been better off with a gross lease.

Landlords can benefit from a triple net lease by avoiding higher-than-expected maintenance and operating costs. Plus, since landlords offering an NNN lease typically charge lower rent, it may be easier to attract tenants and quickly fill vacant spaces.

Is a triple net lease a good investment for a landlord?

As a landlord, a triple net lease property can be an attractive investment. Unlike under a gross lease. where the landlord carries the bulk of the risk, the tenant bears the responsibility of covering most unexpected expenses in an NNN lease.

For the landlord, this type of lease means you generally have to settle for lower rent payments, but you don’t have to worry about unexpected costly repair bills. If you’re looking for a low-maintenance investment, purchasing and leasing a property to a tenant who has to take care of property tax, insurance, and upkeep may be a worthwhile option.

Typically triple net leases are for commercial real estate. Investing in a location to lease out can be a significant and costly undertaking. Plus, finding a reliable, long-term tenant can be difficult and time-consuming. As with any other type of investment, you must weigh the pros and cons of your options. All investments carry risk, and there is no guarantee of any returns.

Real estate investors will need to consider their current portfolio and analyze the market to decide whether purchasing a property to rent out with a triple net lease makes sense for them. Real estate is a highly regionalized market, so what may be a good investment in one area could be a bad idea in another.

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