You may come across a variety of unfamiliar commercial real estate terms when looking for office, retail, or industrial space. The triple net lease, frequently abbreviated as NNN Lease, is a common lease structure in commercial real estate. Despite its widespread use, the triple net lease structure continues to be widely misunderstood.
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Triple Net Lease (NNN) in a Nutshell
What is a triple net lease or NNN lease? Triple net leases (NNN) are lease structures in which the tenant pays for all operations fees associated with the property. The letter N represents:
- Net – Property Taxes
- Net – Insurance
- Net – Operating Expenses
This greatly affects the overall cost of leasing the property, giving the landlord a passive income fund. The tenant is responsible for insurance, building maintenance, and property taxes. Tenants and landlords may benefit from this arrangement since rent with a net lease is typically lower than with a gross lease or percentage lease
Triple net leases are generally cheaper than traditional lease agreements since tenants cover these costs, which would otherwise be the property owner’s responsibility. Renting at a low rate makes it easier to find tenants, so the landlord is less likely to have an empty building.
What Are Included in an NNN Commercial Lease?
Under a triple net lease, the agreed-upon rental rate, or base rent, is basically money in the landlord’s pocket. The money will be used to pay off debts associated with the property, and this can generate income with commercial real estate investing.
On top of this base rent, you must also pay operating expenses. This operating expense will be paid based on an estimated rate, but the tenant is only responsible for paying the actual cost of operating the property during the year. There is no profit to be made from these operating expenses.
There are other aspects of a NNN lease besides the rental rate and operating expenses that affect your overall financial obligation.
Tenant Improvement Allowance
Tenant improvement allowances are funds provided by the landlord to help tenants make improvements to their rented space. In most cases, the landlord offers the tenant a dollar amount per square foot to finish out their office, retail or industrial space.
Rent allowances often cover the costs of updating floors and windows when a new tenant moves into a property. In general, tenant improvement allowances can be used to cover hard or soft costs associated with your place, such as paint, flooring, electrical, etc.
Landlords often offer free rent to tenants on long-term leases as a form of incentive. Exactly as its name implies, free rent is when a landlord gives a tenant a few months’ rent free of charge at the beginning of the lease.
It is important to keep in mind that in a triple net lease, free rent typically only applies to base rent, and the tenant remains responsible for operating costs.
What Are Other Net Leases?
There are several types of net leases. It is common to see all of them used in commercial real estate; however, a triple net lease is the most common.
Double Net Leases
In commercial real estate, double net leases (NN) are also common. When the tenant signs a lease like this, he or she pays two obligations rather than three: property taxes and insurance premiums.
Due to the tenant’s additional expenses, the base rent, which is the rent for the space itself, tends to be lower. In contrast, the landlord is responsible for all maintenance costs, which he pays directly.
Single Net Leases
A single net lease is a commercial real estate lease agreement in which the tenant agrees to pay property taxes in addition to rent. A single net lease is a form of pass-through lease in which taxes associated with the property become the responsibility of the tenant instead of the landlord.
When a single net lease is in place, the landlord is still responsible for the other operating expenses associated with the property. Leases for single nets are less common than commercial leases.
Triple Net Lease vs. Gross Lease: What’s the Difference?
Triple net lease (NNN lease) and gross lease are two common types of commercial real estate leases, each with its own advantages and disadvantages. The primary difference between the two is how expenses related to the property are handled.
In a triple net lease, the renter is liable for covering all or most of the property’s running expenditures, such as property taxes, insurance, and upkeep costs. This can result in a reduced basic rate, but tenants must also consider the property’s additional expenses.
In contrast, a gross lease is a form of lease in which the landlord pays the majority or all of the property expenses, and the rent charged to the tenant includes these costs. Gross leases can be advantageous for tenants who prefer a predictable monthly payment, but they are typically accompanied by a higher basic rent.
Ultimately, the choice between a triple net lease and a gross lease depends on the landlord’s and tenant’s particular requirements and preferences. Each form of lease has advantages and disadvantages, and it is essential to examine the terms and conditions of each before entering into a contract.
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Frequently Asked Questions
Let’s shed light on some of the most common questions about a triple net lease.
Triple net leases require the tenant to cover most of the costs associated with the property. However, the landlord may still be responsible for certain aspects of the property, such as the roof, the structure, and the parking lot. For example, if a roof repair is needed, the landlord may be responsible for covering the cost of the repair. This way, clients who enter the building are protected from any hazards that may arise due to structural damage.
Triple net leases are a type of commercial real estate lease that provides tenants with more control over their buildings. This means that they can customize their spaces to meet their specific business needs without the capital investment of purchasing the building outright. Most of these leases are quite flexible, with tax increases and insurance increases typically being capped or limited in some way. One of the advantages of a triple net lease for landlords is that they provide a reliable source of income with very few overhead costs. The tenant is responsible for making all payments related to the property, including property taxes, insurance, and maintenance expenses. This reduces the landlord’s financial risk and ensures a steady stream of income. costs.
An advantage of a triple net lease for tenants is that they have the option to negotiate the base rental amount with the landlord. Since the tenant is taking on most of the landlord’s overhead, they may be able to negotiate a more favorable base rental amount. In addition, in some cases, tenants and landlords can negotiate aspects of repair costs and utilities, further improving the tenant’s negotiating position. This type of lease is beneficial for landlords as well, as it reduces their financial risk and ensures a steady stream of income. However, it’s important for both parties to carefully review the lease agreement and negotiate terms that work best for their unique situation.
Commercial real estate is most commonly used for net leases, while residential properties are not. The landlord may require residential tenants to pay for some or all of their utilities, and they are often encouraged to purchase their own renter’s insurance. However, a residential landlord would be responsible for the property and liability insurance, as well as real estate taxes.
The choice between a triple net lease and other types of commercial real estate leases depends on your specific needs and preferences as a landlord or tenant. Consider factors such as cash flow, property management, control over the property, number of operating expenses covered, risk, and potential benefits and advantages when making your decision.
President of Saint Investment Group
Nic is a two decade seasoned expert in investing and capital raising, specializing in Real Estate and debt markets. With Saint Investment Group, he leads large-scale distressed asset purchases and innovative syndications for investors.