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What Is a Triple Net Lease? Benefits & Risks Explained

Published by
Jamela Adam
Edited by
Sammi Toner
Fact checked by
Andrew Latham
    • Summary:

    Triple net (NNN) lease agreements are becoming increasingly popular in the commercial real estate space. The three “nets” refer to property taxes, building insurance premiums, and maintenance charges tenants pay on top of their monthly rent payments. With this arrangement, tenants could gain more control over the appearance and upkeep of the property, while landlords enjoy a steady income without much management hassle.

    If you’re a business owner, landlord, or commercial real estate investor, understanding different kinds of commercial leases is key to making smart real estate decisions. One type of lease you may have heard of is the triple net lease. But what exactly does it mean, and how does it work?

    In this article, we’ll unpack and explain the key components of a triple-net lease and its pros and cons for both renters and landlords. Let’s dive in.

    Understanding triple net leases (NNN)

    A triple net lease, also known as an NNN lease, is a common lease agreement in the commercial real estate industry. As its name suggests, a triple net lease requires tenants to pay property taxes, insurance premiums, and maintenance fees — on top of rent.

    An NNN lease is an attractive option for many renters because it allows them to have more control over the property without having to purchase the place outright. It also offers landlords the opportunity to make a consistent income through monthly rent payments while abating costly maintenance tasks.

    What’s included in a triple net lease?

    A triple net commercial lease typically includes several contractual provisions. Here are some of them:

    • Property use. This section specifies how a tenant may use the leased property.
    • Lease term. The landlord will specify the lease’s duration, commencement date, expiration date, and renewal options.
    • Rent amount. Of course, every lease states how much rent costs. This section includes the amount of rent due each month or quarter, as well as any automatic rent increase mechanisms that may have a direct impact on the tenant’s financials.
    • Pro-rata operating costs. This provision details the costs associated with property taxes, insurance, and maintenance to ensure both parties are on the same page regarding financial responsibility.

    Pro Tip

    Though it can be a smart way to rent office space, triple-net leases can be expensive. If you’re looking for a new office location, consider applying for a commercial mortgage before you start your search.

    Calculation of triple net lease example

    Let’s say a landlord leases an office space of 20,000 square feet to a business, Triangle LLC. The landlord charges Triangle LLC a base rent of $0.25 per square foot. The office’s annual common area maintenance fee is $1,500, the property tax is $700, and the annual real estate insurance premium costs $2,000.

    To calculate the total monthly lease amount, we’ll add the maintenance fee, the property taxes, and the insurance costs and divide the total by 12. Then, we’ll add that number to the monthly rent. So, in this case, the monthly lease that Triangle LLC would have to pay their landlord is $5,350.

    Example calculation of a triple net lease monthly rent

    Triple net lease pros and cons

    Is a triple-net lease always a good idea? Not necessarily. As with most opportunities, there are pros and cons to being the lessor or lessee of triple net leased properties.

    For tenantsFor landlords
    Pros
    • Customizable. You have free rein over the appearance and maintenance of the property you’re renting. This freedom allows you to customize the unit according to your business needs and brand style.
    • Choose your own insurance and utilities. Since you’re responsible for not just the rent but also all other operating expenses, you can keep these costs as low as possible by selecting the insurance carrier and utility provider of your choice.
    • Low-risk. Triple net lease investments are a relatively low-risk way to generate a reliable income stream.
    • Don’t have to be an active manager. NNN leases simplify the rental process since all the ongoing expenses — including real estate taxes, building insurance, and maintenance costs — are passed on to the tenant. And since you don’t have to be actively involved in managing the property, this type of lease agreement offers a fantastic form of passive income.
    Cons
    • Additional costs. You’re responsible for any unexpected costs in tax liabilities and maintenance that may arise during the renting period.
    • Must manage property space yourself. Property management can be time-consuming since you’d have to deal with insurance companies, contractors, and other relevant parties yourself.
    • May have fewer tenants. It can be challenging to find tenants who are willing to sign a triple net lease and are capable of assuming ongoing expenses related to the property.
    • Might have expensive repairs. Tenants are responsible for the upkeep of their leased space according to the terms set forth in the agreement. If they neglect to keep up with these obligations, landlords may end up with expensive repair costs when the tenant’s lease period ends.

    Pro Tip

    Maintenance and repair costs can add up quickly depending on the size of the commercial property and where it’s located. So, as a renter, make sure you know what you agree to before signing on the dotted line in a triple-net lease.

    Other types of lease structures in commercial real estate

    A triple net lease agreement is just one of the many common lease structures in commercial real estate. Here are some other ones you should know:

    Lease typeTenant paysLandlord pays
    Full-service leaseBase rent and utilitiesAll building expenses, including insurance, real estate taxes, and maintenance fees
    Single net leaseBase rent, utilities, and property taxesBuilding insurance and maintenance fees
    Double net leaseBase rent, utilities, property taxes, and building insurance premiumsMaintenance costs
    Modified gross leaseBase rent, utilities, and a portion of operating expensesThe other portion of operating expenses
    Percentage leaseBase rent plus a specific percentage of gross business sales (revenue)Some or all the property taxes, building insurance, and maintenance costs

    FAQs

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

    A single net lease is a commercial real estate agreement that requires the tenant to pay rent and one additional expense: property taxes. On the other hand, a triple net lease requires the tenant to pay rent plus three other associated costs: property insurance, property taxes, and maintenance costs.

    Generally speaking, NNN leases tend to be more favorable for landlords since there’s less management hassle, and they don’t have to worry about managing additional expenses.

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

    In a double net lease, the tenant is responsible for paying two other obligations on top of rent: property taxes and insurance premiums. All maintenance expenses still remain the responsibility of the landlord, who pays them directly. With a triple net lease, on the other hand, all three of these expenses are taken care of by the tenant.

    Compared to single net leases, double net leases and triple net leases are much more common in the commercial real estate industry.

    Key Takeaways

    • A triple net lease (NNN) is a type of commercial real estate agreement that requires the tenant to pay rent plus three other associated costs: property insurance, property taxes, and maintenance.
    • NNN leases provide real estate investors peace of mind by reducing their liability while giving tenants greater control over the property and its associated costs.
    • A triple net commercial lease includes several contractual provisions so both parties have an understanding of their rights and obligations.

    Invest in the best business real estate

    Overall, triple net leases can be advantageous to both landlords and tenants. But before signing on the dotted line, be sure to have an experienced real estate attorney help you review the lease agreement. If not, you could face serious consequences for breaking a lease early or failing to meet your duties specified in the lease agreement.

    If you’re looking to buy rather than rent commercial property for your business, check out our reviews of the best commercial real estate financing options and compare rates across various commercial mortgage providers. By taking the time to perform your due diligence, you can invest confidently in the perfect property for your business.

    View Article Sources
    1. Triple Net Lease — Legal Information Institute
    2. Prologis’s Solution For Accessing Tenant Utility Data In Triple-Net Leased Buildings — U.S. Department of Energy
    3. Lessor vs. Lessee: Here are the Differences — SuperMoney
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    5. What Does “Estate for Years” Mean in Real Estate? Definition and Examples — SuperMoney
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    7. Does Breaking a Lease Affect Your Credit Score? — SuperMoney
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    9. Chinese Real Estate Investors Reverse Decade-Long Buying Spree — SuperMoney
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