What Is a Triple Net Lease?
A triple net lease (triple-Net or NNN) is a lease agreement on a property whereby the tenant or lessee promises to pay all the expenses of the property including real estate taxes, building insurance, and maintenance. These payments are in addition to the fees for rent and utilities, and all payments are typically the responsibility of the landlord in the absence of a triple, double, or single net lease.
- With a triple net lease, the tenant agrees to pay the property expenses such as real estate taxes, building insurance, and maintenance in addition to rent and utilities.
- Triple net leases tend to have a lower rent charge because the tenant assumes more of the ongoing expenses for the property.
- A single net lease on a commercial property includes property taxes in addition to rent.
- A double net lease on a commercial property includes property taxes and property insurance in addition to rent.
- Triple net leased properties have become popular investment vehicles for investors because they provide low-risk steady income.
Watch Now: What Is a Triple Net Lease (NNN)?
Understanding Triple Net Leases
If a property owner leases out a building to a business using a triple net lease, the tenant is responsible for paying the building’s property taxes, building insurance, and the cost of any maintenance or repairs the building may require for the term of the lease. Because the tenant is covering these costs, which would otherwise be the responsibility of the property owner, the rent charged in the triple net lease is generally lower than the rent charged in a standard lease agreement. The capitalization rate, which is used to calculate the lease amount, is determined by the creditworthiness of the tenant.
In commercial real estate, a net lease is a lease in which the tenant is required to pay a portion, or all, of the taxes, fees, and maintenance costs for a property. A single net lease requires tenants to pay property taxes in addition to rent, and a double net lease typically tacks on property insurance.
Double Net Leases
Double net (NN) leases, are also popular in commercial real estate. In a lease like this, the tenant pays two instead of three obligations: property taxes and insurance premiums in addition to the rent. The base rent— payable for the space itself—is generally lower because of the additional expenses the tenant must bear. All maintenance costs, on the other hand, remain the responsibility of the landlord, who pays for them directly.
Single net (N) leases are not as common. Here, the landlord transfers a minimal amount of risk to the tenant, who pays just the property taxes.
Triple net leased properties have become popular investment vehicles for investors seeking steady income with relatively low risk. Triple net lease investments are typically a portfolio of properties with three or more high-grade commercial properties fully leased by a single tenant with existing in-place cash flow. The commercial properties could include office buildings, shopping malls, industrial parks, or free-standing buildings operated by banks, pharmacies, or restaurant chains. The typical lease term is for 10 to 15 years, with built-in contractual rent escalation.
The benefits for investors include long-term, stable income with the possibility of capital appreciation of the underlying property. Investors can invest in high-quality real estate without concern for management operations including vacancy factors, tenant improvement costs, or leasing fees. When the underlying properties are sold, investors can roll their capital into another triple-net-lease investment without paying taxes through a 1031 tax-deferred exchange.
Investors in triple net lease investment offerings must be accredited with a net worth of at least $1 million excluding the value of their primary residence or $200,000 in income ($300,000 for joint filers). Smaller investors may participate in triple net lease real estate by investing in real estate investment trusts (REITs) that focus on such properties in their portfolios.
Frequently Asked Questions
Is a Triple Net Lease a Good Idea?
For both tenants and landlords, triple net leases can offer some benefits. A tenant has more freedom with their structure; they can customize their space for more brand uniformity without the capital investment of a purchase. Another advantage is that these leases tend to be quite flexible: caps to tax increases, insurance increases, etc. For the landlord, triple net leases can be a reliable source of income and have very few overhead costs. The landlord also does not have to play an active role in the management of the property.
Do I have to worry about paying these obligations on the apartment I rent?
Probably not. Net leases are most commonly used in commercial real estate and not for residential units. Residential tenants may be required to pay some or all of their utilities, and will often be encouraged to purchase their own renter’s insurance. A residential landlord, however, would typically pay for the property and liability insurance and real estate taxes.
Can You Negotiate a Triple Net Lease?
With a triple net lease, almost all responsibilities fall on the tenant. The tenant is responsible for paying rent, as well as all overhead costs associated with owning the property: taxes, insurance, operating expenses, utilities, etc. As a result, the base rental amount can become a key negotiating term. Because the tenant is taking on the risk of the landlord’s overhead, they may be able to negotiate a more favorable base rental amount. Also, in some cases, tenants can negotiate what aspects of repair costs and/or utilities the landlord is responsible for.
How Do You Calculate a Triple Net Lease?
There are various ways that the amount of a triple net lease can be calculated. Sometimes landlords will add up all the property taxes, insurance, maintenance expenses, and common area expenses for a building and divide the total by 12. This number is the monthly cost. This process is simplified when only one tenant is leasing a building. The monthly base rental amount is typically calculated based on a rate per square footage.
What Is the Landlord Responsible for in a Triple Net Lease?
The tenant is responsible for most expenses related to a commercial property with a triple net lease. However, the landlord may be responsible for the roof and the structure, and sometimes the parking lot.
View more information: https://www.investopedia.com/terms/t/triple-net-lease-nnn.asp