Contracts for commercial real estate leasing can be complicated, especially when dealing with a large building with several tenants. A “NNN or triple net lease” is one of the more perplexing terms thrown in there.
In reality, a triple net lease isn’t all that hard and is relatively common. It effectively shifts some costs of building owners to the tenant or tenants. In this post, we’ll go over everything you need to know about triple net leases so you can decide if they’re suitable for your portfolio.
What Is a Triple Net Lease?
A triple net lease also called an NNN lease, is one in which the tenant handles the basic rent, monthly property taxes, insurance, and maintenance. The landlord or investor can operate passively, collecting their income while the tenant handles the rest.
The structure of triple net leases usually has lower base rates but is more profitable overall because the tenant covers the remaining expenses.
What Does a Triple Net Rental Rate Include?
Your agreed-upon rental rate, or base rent, is practically money in the landlord’s pocket in a triple net lease. This cash will pay off any debt on the property and is where a profit can be created.
You also agree to pay operating charges on top of the base rent. While these running expenses will be paid at an expected rate, the renter is only responsible for paying the actual cost of operating the property over the year. The operating costs yield no profit.
What Are the Types of Real Estate Leases?
While triple net leases are common in commercial real estate, they are not the only type of lease. There are numerous lease types, and each has a slightly different definition depending on the professional’s and industry’s perspective.
Other types of commercial leases, besides triple net leases, include:
- Single Net Lease: Tenants in a single net lease pay a fixed rent plus a portion of the property tax, which is negotiated with the landlord. The landlord then pays for the building’s expenses, while the tenant pays directly for utilities and other services.
- Double Net Lease: A double net lease, also known as a ‘net-net’ or ‘NN’ lease, is a type of leasing agreement in which the tenant handles both property taxes and building insurance costs. Unlike a single net lease, which simply requires the tenant to pay property taxes, a double net lease compels the tenant to pay additional expenses like insurance premiums.
- Absolute Net Lease: In an absolute net lease, also known as a bondable lease, the tenant handles the rent and other property-related expenses, such as the roof and structure. The property owner or investor is totally relieved of all financial obligations under this arrangement. An absolute net lease is a type of NNN lease that is typically used when the investor borrows money to finance the commercial property and places additional risks in the hands of the tenant.
- Modified Gross Lease: A modified gross lease includes the tenant’s and the landlord’s expenses. The landlord typically pays taxes and insurance, but the tenant is still responsible for office expenses, such as janitorial services. Utilities may be paid for by either the tenant or the landlord.
- Gross Leases: All property operating expenses are included in the tenant’s base rent in a gross or full-service lease. As a result, the base rent appears to be higher than other lease types because the landlord covers property costs from the tenant’s rent.
What Are the Characteristics of Triple Net Leases?
In theory, any lease could be a triple net lease. However, it is far more common for commercial tenants than for residential tenants in practice. Triple net leases can exist in multi-tenant and single-tenant properties, with some distinctions between the two. Tenants pay other expenses that the property incurs above the base rent for the space in all triple net leases, such as property taxes, insurance, and any property maintenance. It should be noted that maintenance can include both routine and emergency maintenance, such as storm damage or other major damages.
In a multi-tenant property, a tenant under a triple net lease would typically pay a pro-rata share of the property’s tax, insurance, maintenance expenses, and any contractual obligations to reimburse common area expenses and rent. In the scenario of a single-tenant property, the renter handles all expenses besides the base rent.
What Are the Benefits of Triple Net Lease to Landlords and Investors?
There’s a reason triple net leases are so popular among landlords or investors.
On the lessor side, the key benefits of NNN leases are as follows.
- Passive Income: If a landlord/investor is involved in rental operations, the NNN lease is closest to a passive income source. Landlords can sit back and collect money every month unless they have a large repair project for which they are liable under the lease.
- Minimal Management: Landlords have little management involvement in this lease structure because the tenant pays most of the expenses and handles the day-to-day operations. The landlord only needs to collect monthly rent and pay the utilities to fulfill their management duties.
- Credible Tenants: Most triple net leases are granted to tenants who have a proven track record. These tenants use the property’s location as part of their brand marketing and rarely compromise their brand. For example, the branding for a national coffee shop chain is the same at every location. They rent in high-end neighborhoods and sign long-term leases. When a tenant signs a NNN lease, the landlord has a high assurance that they will be dependable tenants.
- Longer Lease Term: Most triple net lease agreements are designed to provide long lease terms for tenant occupancy. A leasing term of ten years or more is advantageous for landlords because it eliminates the risk and loss of a vacant property between tenants.
- Favorable Financing: Lenders frequently offer attractive financing terms to investors who sign triple net leases with solid tenants. If trustworthy tenants signed triple net commercial leases, investors could finance properties with as little as a 5% down payment. Commercial property with a different lease structure, on the other hand, may necessitate 20% or more equity.
- Transferable Leases: A triple net lease is transferable to the new owner upon sale, whether an investor owns all or part of the property. The property is more appealing to new investors because of its transferability.
What Are the Benefits of Triple Net Lease to Tenants?
Triple-net leases are popular among tenants for the following reasons.
- Lower Rent: The tenant pays a lower gross rent under this arrangement. The rent is lower because the tenant is liable for all other property-related expenses.
- More Control Over the Property: You handle maintenance and repair charges as a tenant in a triple net lease arrangement. This puts more power in your hands when deciding which repairs to accomplish and which contractors to hire. The tenant can select and carry out necessary property changes that will allow their business to develop and boost revenue.
- Prime Location: Triple net leases are frequent for high-value assets with high traffic and exposure. Commercial holdings in the downtown area, for example, would be eligible for a triple net lease. These areas of business are experiencing rapid expansion. Companies that have a presence in such a good location might make significant money.
What Are the Things to Know About Triple Net Lease?
When they hear the terms triple net or NNN lease, most people think of an absolute net lease. However, just because a lease is branded as a NNN lease does not always imply an absolute net lease.
For instance, if a building is brand new, the tenant may be liable for funding replacements such as the roof or HVAC systems when they wear out over time. However, in older buildings, a lease may be referred to as triple net, but it actually requires the property owner to finance these capital expenditures over time rather than the tenant.
Triple net leases are multifaceted and can be confusing, so reading every detail is the only way to properly comprehend a lease’s terms and circumstances. Simple labels such as triple net, full service, or modified gross, which brokers and property owners frequently employ, can contradict the real lease terms.
Is a Triple Net Lease a Good Idea?
Triple net leases can be advantageous to both tenants and landlords. A tenant has more flexibility with their structure; they can customize their space for greater brand consistency without the capital investment of a purchase. Another advantage is that these leases are often quite flexible, with caps on tax increases, insurance increases, etc. Triple net leases can provide landlords with a dependable source of income with little overhead expenditures. The landlord is also not required to be actively involved in the property’s management.
Can You Negotiate a Triple Net Lease?
Almost all responsibilities fall on the tenant in a triple net lease. The tenant pays the rent and all other costs associated with owning the property, such as taxes, insurance, operating expenses, utilities, and so on. As a result, the base rental amount may become an important negotiating point. Because the tenant assumes the risk of the landlord’s overhead, they may negotiate a lower base rent. Sometimes, tenants can negotiate which aspects of repair costs and utilities are the landlord’s responsibility.
How Do You Calculate a Triple Net Lease?
To calculate a triple net lease, you must consider several aspects, including the annual property tax amount, insurance, estimated or average maintenance expenditures for the last few years, and the building’s square footage.
Once you have all of those numbers, put them all up and divide by 12 to obtain your monthly total. Then you can add that monthly amount to your rent.
Formula:
Base Rent = Rent Per Square Footage X Total Leased Area.
Lease Amount = (Base Rent + Property Tax + Property Insurance + Common Area Maintenance)/12
What Is the Landlord Responsible for in a Triple Net Lease?
The landlord is often responsible for structural and roof-related maintenance and repair expenditures in a triple net lease. To prevent the possibility of late fines or penalties, they frequently take on paying taxes, insurance premiums, and so on directly with the tenant’s payments.