What Is a Triple Net Lease? Benefits & Risks Explained
JA
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.
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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.
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 tenants | For landlords | |
|---|---|---|
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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 type | Tenant pays | Landlord pays |
|---|---|---|
| Full-service lease | Base rent and utilities | All building expenses, including insurance, real estate taxes, and maintenance fees |
| Single net lease | Base rent, utilities, and property taxes | Building insurance and maintenance fees |
| Double net lease | Base rent, utilities, property taxes, and building insurance premiums | Maintenance costs |
| Modified gross lease | Base rent, utilities, and a portion of operating expenses | The other portion of operating expenses |
| Percentage lease | Base 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.
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