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.
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:
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.
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 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.
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.
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.
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.
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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 be responsible for the roof, the structure, and the parking lot.
Tenants have more control over their structures; they can customize their spaces without the capital investment of a purchase. Most of these leases are quite flexible: tax increases are capped, insurance increases are limited, etc. Triple net leases are a reliable source of income for landlords and incur very few overhead costs.
An important negotiating term can be the base rental amount. Tenants may be able to negotiate a more favorable base rental amount since they are taking on the landlord's overhead. In some cases, tenants and landlords can negotiate some aspects of repair costs and utilities.
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.