Triple Net Lease (NNN)

Understanding triple net leases (NNN)

In a triple net lease, the tenant (occupier) agrees to cover all property costs, including real estate taxes building insurance/ maintenance, in addition to rent and utilities. In contrast, in traditional commercial leases, the landlord usually handles some or all of these expenses.

Different types of net leases

Triple net leases are simply one type of net lease for commercial properties:

  • Single Net Lease: The tenant pays rent and property taxes.
  • Double Net Lease: The tenant (occupier) pays rent, property taxes, and property insurance.

How do triple net leases work?

In a triple-net lease, the lessee is responsible for property taxes, building insurance, and maintenance costs. Because the tenant takes on these expenses, the rent is usually lower than in a typical lease. The anticipated return on a commercial property, or capitalisation rate ("cap rate"), often factors in the tenant's creditworthiness to determine the lease price.

Know more about beneficial ownership information.

Calculating triple net lease amount

Here's how to calculate the lease value in a triple net lease setup:

Lease Value = (Base Rent + Common Area Maintenance + Property Tax + Property Insurance) / 12

Base Rent = Rent Per Square Feet × Total Leased Area

Steps:

  1. Calculate the base rent by multiplying the rent per square foot by the total leased area. If rent per square foot is monthly, multiply by 12 for the annual rate.
  2. Determine annual costs for maintenance, property taxes, and insurance.
  3. Add the base rent, maintenance fees, property taxes, and insurance.
  4. Divide the total by 12 to find the monthly lease amount.

Advantages of triple net leases

For Tenants:

  • Control over the maintenance, repairs, and appearance of the property.
  • Direct management of utility expenses like water and electricity.

For Landlords:

  • Reliable income source.
  • Reduced management hassles as tenants handle utilities, repairs, taxes, and property management fees.

Disadvantages of triple net leases

For Tenants:

  • Responsible for any increases in property taxes and insurance costs.
  • Potentially overestimated operating costs, leading to higher expenses.
  • Time and effort are required for property maintenance and handling repairs, insurance, and taxes.
  • Additional expenses over the lease term.

For Landlords:

  • Finding reliable tenants willing to sign a triple-net lease can be challenging.
  • Potential income loss during vacancies.
  • Tenant credit risk is crucial as tenants are responsible for ongoing expenses.

Further reading: What are liabilities? 2024 edition with examples.

In short

In a triple net lease (NNN) setup, the tenant pays for building insurance maintenance/real estate taxes in addition to rent plus utilities. These leases are common in commercial real estate and usually offer lower rents because the tenant takes on many of the property costs. Variants include double net leases (covering property taxes and insurance) and single net leases (covering property taxes only).

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