What Is a Triple Net Lease (NNN)?
Atriple netlease (triple-netor 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 expenses are in addition to the cost of rent and utilities. In contrast, in standard commercial lease agreements, some or all of these payments are typically the responsibility of the landlord.
NNNs are just one type of commercial property net lease. A single net lease requires tenants to pay property taxes in addition to rent, and a double net lease typically tacks on property insurance.
- With atriple netlease (NNN), 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 are commonly found in commercial real estate.
- Triple net leases tend to have lower rents because the tenant assumes ongoing expenses that would otherwise be the responsibility of the property owner.
- Other net leases are a single net lease, in which the tenant pays property taxes, and a double net lease, which includes property taxes and property insurance.
- Triple net leased properties have become popular investment vehicles for investors because they provide low-risk, steady income.
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Understanding Triple Net Leases (NNN)
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.
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 ("cap rate") is the expected rate of return on a commercial property. The cap rate, which is used to calculate the lease amount, is often determined, in part, by the creditworthiness of the tenant.
Advantages and Disadvantages of Triple Net Leases
The main advantage of triple net leases for both tenants and landlords is that they are simple to understand and easy to manage since the tenant is responsible for all operating expenses, but they may present some inconveniences too.
Pros of Triple Net Leases
- The tenant has total control over the maintenance, upkeep, and appearance of the
- The tenants also have direct control over the costs they pay, such as electricity or water. They can also select the insurance carrier of their preference and can protest the taxes if necessary to keep them as low as possible.
- A triple net lease is a steady and consistent revenue stream.
- A triple net lease involves less management hassle since utility expenses, repair costs, taxes, and any property management costs and issues are the responsibilities of the tenant. This leaves the landlord more time to focus on their primary business.
Cons of Triple Net Leases
- The tenant assumes the risk of property tax and any increase in the price of insurance. They also assume any cost involved in maintaining the property.
- The landlord might overestimate the operating costs when determining the rental price, which results in the tenant overpaying for some of the costs.
- Tenants might invest some work and time in property management, from hiring repair companies to comparing and buying insurance and protesting taxes if needed.
- Some unexpected costs (in maintenance or tax liabilities, for example) may arise during the time of occupancy.
- Finding good and reliable tenants who are willing to sign a triple net lease could be a challenge. Another factor to consider is the downtime in between tenants, which could result in no rental income while the building is vacant.
- The tenant credit risk should be a concern for landlords. The tenant's financial strength and stability are key since they are responsible for operating expenses.
Triple Net Leases vs. Single Net Leases and Double Net Leases
Triple net leases NNNs are just one type of commercial net lease.
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.
Double net (NN) leases are also common 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.
Investing in Triple Net Leases
Triple net leased properties have become popular investment vehicles for investors seeking steady income with relatively low risk. Triple net lease investments typically consist of a portfolio of 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.
Commercial property is real estate that is used for business activities or profit-generating purposes. It usually refers to buildings thathouse businesses, but can also refer to land used to generate a profit, as well as large residential rental properties.
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 management concerns like vacancies, 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.
Triple Net Lease Example
Below is a hypothetical example of a triple net lease:
|Recoverable expenses from tenant||$175,000|
|Total rent annually||$2,168,000|
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 on 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.
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.
Do I Have to Worry About Paying Net Lease Obligations on the Apartment I Rent?
Probably not. Net leases are most commonly used incommercial 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.
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.
The Bottom Line
A triple net lease can be a good option since this type of lease offer both landlords and tenants several advantages and can benefit both parties. While landlords can hand off paying various property expenses, enjoy a stable source of income, and are able to focus on their own business, tenants, on the other hand, can receive a lower monthly rent.
Nevertheless, landlords and tenants alike should explore other types of leases, including single net leases and double net leases
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Some of the benefits that pro-NNN people claim about NNN is that it increases energy levels, improves self-confidence, boosts mental clarity, increases testosterone, and increases physical output in the gym. For many men dealing with erectile dysfunction, sex or masturbation can become especially stressful.What are the best triple net leases? ›
For example, companies like Walgreens, CVS, McDonalds, or Dollar General often like to utilize the triple net lease structure. These tend to be the best triple net lease tenants because they are large, publicly traded companies that are financially strong. As a result, they present reduced credit risk for investors.What does NNN stand for? ›
NNN stands for net, net net which are the property's operating expenses (taxes, insurance, & common area maintenance fees) that the owner passes through to tenants. Keep in mind that the NNN are in ADDITION to the base rent that you negotiate.Who is responsible for repairs in a commercial lease? ›
A full repairing and insuring lease will typically require the tenant to keep the property 'in good and substantial repair' or 'in good and substantial repair and condition'. If the property is not in good repair at the start of the lease, the tenant may have to bring it up to that state and then maintain it.Is NNN lease a good investment? ›
NNN Properties in California are an excellent investment option. They offer greater cash flow, appreciation potential, and diversification. If you're looking for a safe investment that will pay off over time then it's definitely worth considering NNN properties in California!What are the disadvantages of NNN? ›
The very apparent disadvantage to the tenant in a NNN lease is the costs associated with the property that they have to bear no matter what. Unlike the rent of the property, which is pre-decided in the agreement, the costs are not fixed. Tax rates and insurance premiums can increase.Can you negotiate NNN lease? ›
There are many areas where a tenant can negotiate a NNN lease to make it more favorable. First, the base rental amount becomes a key negotiating term. If the tenant is taking on all responsibility and risk of the landlord's overhead, then the tenant may be able to negotiate a more favorable base rental amount.What is an example of a triple net lease? ›
A triple net lease is an agreement between a property owner and a tenant where the tenant pays property taxes, insurance premiums, and maintenance upkeep and repairs, in addition to a monthly rental fee of the building or space.What is a good cap rate for NNN properties? ›
NNN Cap Rate
You will see all NNN properties for sale advertised with the cap rate, or capitalization rate, usually between 5.50% and 7.00%. This number is the level of equity return on your investment for a single year. A higher cap rate, which would indicate slightly more risk, typically provides a better ROI.
What Is a Triple Net Lease (NNN)? 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 expenses are in addition to the cost of rent and utilities.
Benefits of a Triple Net Lease
The most obvious benefit of using a triple net lease for a tenant is a lower price point for the base lease. Since the tenant is absorbing at least some of the taxes, insurance, and maintenance expenses, a triple net lease features a lower monthly rent than a gross lease agreement.
NNN Expenses are the fees paid by a commercial tenant for their share of the common area maintenance, real estate taxes, and landlord insurance premiums. Commercial leases where the tenant pays these expenses are referred to as triple net leases.What does landlord pay in triple net lease? ›
What expenses does the landlord pay for in a triple net lease? Landlords favor triple net commercial leases because this lease structure allows them to pass along expenses for property taxes, building insurance, and CAM to the building's tenants. The landlord will typically pay for utilities and debt service.What is the most important landlord responsibility? ›
- Managing tenants. The relationship you have with a tenant may last for years so it's important to manage that relationship professionally and cordially. ...
- Warranty of habitability. ...
- Property maintenance. ...
- Abiding by housing laws. ...
Act 1974, tenants are always responsible for complying with Fire Safety Regulations (see below) and for providing a workplace with: A reasonable temperature. Adequate lighting, space and ventilation. Drinking water.How do you finance NNN properties? ›
- Meet the net worth and/or income requirements.
- Have a high credit score.
- Choose a triple net lease tenant with an investment-grade rating or a high-credit company that guarantees the lease.
- Ensure the lease is long-term with rent escalations.
- Select a NNN tenant in a prime location.
The term net lease refers to a contractual agreement where a lessee pays a portion or all of the taxes, insurance fees, and maintenance costs for a property in addition to rent. Net leases are commonly used in commercial real estate.How is triple net lease calculated? ›
Calculating a Triple Net Lease
Triple net leases are calculated by adding the yearly taxes on the property and the insurance for the space together and dividing that amount by the building total rental square footage.
Triple net leases are widely popular among commercial real estate landlords, and as you search for your next office space, you're sure to come across this type of lease. This common lease is sometimes written as “NNN,” an abbreviation of “net, net, net.”What does Triple Net include? ›
A triple net lease, also known as an NNN Lease, is a lease in which the tenant agrees to pay their pro-rata share of all expenses associated with property maintenance, taxes, and insurance, in addition to a predetermined base rental rate.
- Determine Your Preferred Investment Returns. ...
- Find A Triple Net Lease Advisor. ...
- Set Your Tenant and Term Criteria. ...
- Find The Right Lending Partner. ...
- Compare Opportunities and Submit an Offer. ...
- Perform Thorough Due Diligence on The Asset and Tenant.
Those costs are taxes, maintenance, and insurance. WeWork 260 Queen Street in Brisbane, Australia. A triple net lease is the flipside to a gross lease, where the tenant pays a simplified, all-inclusive rent to the landlord, who uses that cash to cover the expenses of running the building as they see fit.Do commercial tenants have to pay building insurance? ›
Does a Commercial Tenant Pay for Buildings Insurance? Yes, but only where the terms of the lease require them to do so. To reiterate, the commercial tenant should not actually arrange the buildings insurance policy – this is the responsibility of the Landlord/Freeholder/Property Owner.How do you make an offer on a commercial lease? ›
- Ask for a rent-free period. ...
- Consider the duration of the term. ...
- Avoid putting your name down as the lessee. ...
- Keep away from personal guarantees. ...
- Negotiate repair obligations. ...
- Ensure that there's a break clause. ...
- Decide security of tenure. ...
- Look into a sub-letting clause.
Modified Triple Net Leases
Typically, capital expenditures will be handled in one of two ways: (1) the expenditures will be the responsibility of the landlord or (2) the expenditures will be depreciated, and the tenant will pay for depreciation during the lease term.
Since a NNN lease is a commercial property lease, the regular (i.e., straight line) depreciation deduction is spread across a 39-year life span. The tenant is not able to deduct depreciation. However, the tenant can still deduct various operating expenses related to the lease.What is not included in triple net? ›
How Triple Net Leases Work. A triple net lease works by a commercial property owner leasing a building or space to a tenant. However, instead of including all taxes, insurance, and common area maintenance (CAM) in the rent amount, the tenant pays an equal portion based on square footage.How do you know if a commercial property is a good investment? ›
Net Operating Income
To determine the NOI of a property add all sources of revenue (rent, leases, parking) then subtract all expenses (utilities, maintenance, taxes, but not mortgage) from that number. A property with a high NOI is the better investment.
To calculate cap rate, divide the net operating income (which from absolute NNN lease properties is rent received) by the purchase price or current market value of the property.What happens to cap rates when interest rates rise? ›
As shown in the chart above, higher interest rates contributed to an increase in the potential cap rate, but upward pressure from slower CRE price growth will be a much more significant contributor to the increase in the second quarter potential cap rate.
First off, NNN is purely a 'Brothers-in-Arms' club; anyone can participate, but majority participants are male.What does NNN stand for on Tik Tok? ›
NNN is an acronym that stands for “No Nut November.” If you're wondering what that means, it's basically a viral challenge that trends on social media every year and revolves around abstaining from sex and self-pleasure for the whole month of November.Is NNN monthly or yearly? ›
For example, a landlord advertises a rent of $30 NNN per sq. ft. The NNN indicates that it's a triple net lease. Therefore, the base rent amount per year for a 1,000 square foot space is $30,000 a year or $2,500 a month.What is NNN meme? ›
But while our cup (or plate) runneth over with greed, our generation knows November to be perhaps the most pleasureless month of all: No Nut November (NNN) — the internet challenge that asks men to not ejaculate for 30 days.What does landlord pay in triple net lease? ›
What expenses does the landlord pay for in a triple net lease? Landlords favor triple net commercial leases because this lease structure allows them to pass along expenses for property taxes, building insurance, and CAM to the building's tenants. The landlord will typically pay for utilities and debt service.How is NNN calculated? ›
Calculating NNN Leases
Dividing the yearly base amount by 12 months will give you $5,000 as the monthly base amount. As for the NNN or other expenses, the landlord advertised $5. You multiply $5 with the square footage (2,000 sq. ft.) to get an annual fee of $10,000.
NNN is an acronym that stands for 'No Nut November'. The phrase emerges every year as the annual internet trend reappears.What is the downside of a triple net lease? ›
Cons of Triple Net Leases
For landlords who are locked into a long-term lease, they lose the ability to increase the rent if property values in the area increase. In the long-term, this can limit earning potential.
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 expenses are in addition to the cost of rent and utilities.How does Triple Net work? ›
In a Triple Net lease, the tenant pays a base rent plus all or part of the three “nets”–property taxes, insurance, and common area expenses (“CAMS”). Common area utilities and operating expenses are usually lumped in as well (ie the cost of security or a front desk attendant).