Are you getting ready to lease to your first commercial tenant and unsure what lease agreement to use? Landlords have numerous options for commercial real estate leases, and choosing the right one can significantly impact rents, operating expenses, and more. Today, we’re examining one of the most popular types of leases for commercial properties: the triple-net lease.
Up ahead, we’ll cover everything you need to know about this popular style of commercial lease agreement, including how they work, how they differ from other options, and what you need to be able to sign one.
What Is a Triple-Net (NNN) Lease?
A triple-net lease, also known as simply a triple-net or NNN, is a type of lease agreement on a property, most often commercial real estate.
NNNs are one of several types of so-called net leases, the other two common options being single and double-net leases. In a net lease, the lessee typically assumes some or all costs of maintaining the property.
In a triple-net lease specifically, the lessee takes responsibility for practically all property expenses, including real estate taxes, property insurance, and maintenance costs. For example, repairs to the property due to wear or damage are paid for by the lessee.
In a NNN lease, the lessee will be responsible for their portion of common area maintenance (CAM). This includes the cost of repairs on common areas, insurance, and taxes.
In addition to assuming costs otherwise reserved for the property owner, the lessee in a net lease is still responsible for making regular rent and utility payments. However, the rent may be lower than it would be otherwise. This lower rent reflects and counterbalances the additional burdens the tenant assumes in a net lease.
Purpose and Benefits of a Triple-Net Lease
Property owners favor triple-net leases for one primary reason: they reduce risk and variability.
An NNN reduces a property’s cash outflow almost entirely, even if that means partially reducing its inflow. The main benefit here is that it dramatically reduces the number of variables in the equation.
Things like a tax increase or re-appraisal, insurance hike, or significant maintenance issue no longer threaten the owner’s cash flow during the term of an NNN. Instead, the tenant absorbs those risks. This agreement also gives the tenant a vested interest in using the property responsibly and keeping up with routine maintenance.
So long as the tenant reliably makes payments on time, the lessor can easily and accurately predict and measure cash flows on the property. Outsourcing some of the recurring and variable costs streamlines this process significantly, making it easier to steadily build wealth.
NNNs drastically reduce overhead and allow for stable income accompanied by capital appreciation of the property. It may also be appealing that under lease terms like these, the landlord typically does not need to conduct any active management of the property.
Benefits of an NNN for Tenants
Leasing a property under an NNN can also benefit the lessee. Perhaps the most significant positive is that renting under these terms often gives the tenant more freedom and flexibility with the property. In particular, covering the costs of property maintenance and upkeep may give the occupying party more control over building and renovations.
For instance, depending on the specific terms of commercial leases, tenants may be able to customize the facade of a building to conform to a brand style. Alternately, the lease structure may give them the freedom to
Net leases also typically include lower base rent, with the possibility of negotiating it to be even lower. This benefit enables tenants to reduce their fixed operating costs on top of working to lower their flexible ones.
Disadvantages of a Triple-Net Lease
There aren’t many significant downsides to NNNs, but there are still a couple things worth mentioning.
First, they reduce the volume of cash flow on the property. Remember, due to the additional operating costs that NNN lessees adopt, the regular month-to-month rent in these deals is usually considerably lower. Of course, this is usually a net benefit, as reducing owner expenses can outweigh the lower rent. However, in some cases, landlords may prefer the higher upfront income of a gross lease, even if it comes with higher expenses.
The other challenge with triple-net leases, particularly for relatively new real estate investors who may not have much of a portfolio yet, is that there are specific requirements you need to meet to be able to issue one. That is to say that not everyone is eligible to use NNNs. We’ll cover those requirements in more detail up ahead.
Requirements for a Triple-Net Lease
If you’re a real estate investor considering using a triple-net lease for an office space, retail space, or other commercial property, you should know there are specific requirements you will need to meet first.
Not everyone is eligible to negotiate triple-net real estate leases. For an individual investor, you need to be able to prove you have one of the following:
- A net worth exceeding $1 million, not including your primary residence
- An annual income of at least $200,000
For couples filing jointly, the income bar rises to $300,000. So if you are looking to sign your first commercial lease agreement, you may not yet be ready to clear these requirements.
If you are a newer investor in the real estate market and looking to get involved with net leased properties, there is one other option that does not have these requirements. Even with relatively low income and net worth, you can still invest in real estate investment trusts (REITs) that specialize in these types of leases.
Triple-Net Vs. Other Commercial Lease Types
Unlike typical residential leases, there are several common types of agreements available when you lease commercial property. Depending on various details of the property, the tenant, and other situational factors, some will work better than others in different cases.
Let’s take a quick look at some of the most common alternatives to a triple-net lease and where they overlap and differentiate.
Triple-Net Vs. Single-Net and Double-Net Leases
The triple-net lease has two siblings, which are rather similar: the single-net and double-net lease. Fortunately, the difference between the three is quite clear-cut. There are three main expenses a net lease might concern itself with, apart from rent and utilities:
- Property taxes
- Property insurance
- Maintenance and janitorial services
In a single-net lease, the lessee assumes only the first of these responsibilities, and the other two remain with the owner.
As you may expect, the occupant is responsible for the first two sets of costs in a double-net lease. And in a triple-net lease, as discussed above, a lessee assumes the burden of all three of these expenses.
Each type of net lease shifts a different amount of the overall cost burden of the property from owner to tenant. Single and double-net leases transfer only some of these expenses, whereas, in a triple-net lease, the tenant takes on almost all costs associated with the property.
Triple-Net Vs. Absolute Net Leases
An absolute net lease is less popular than the other three types of net leases, though it is pretty similar to an NNN, and investors often conflate the two.
An absolute net lease requires the least landlord involvement in any commercial real estate lease. Owners who lease properties in this way take absolutely no responsibility for expenses associated with the property.
The critical difference between a triple-net and an absolute net lease is that a triple-net abdicates responsibility for three specific expenses (taxes, insurance, and maintenance). In contrast, an absolute net is broader and transfers all cost burdens to the lessees.
While, in many cases, the result would be similar or even the same under these two types of lease agreements, an absolute net lease does offer just that little bit of extra risk protection and passivity to the landlord.
Triple-Net Vs. Gross Leases
A gross lease is effectively the opposite of a net lease. Where the latter transfers some operating expenses to the lessee, the former keeps all of them on the lessor.
In a gross lease, the landlord and tenant agree on a flat rental fee. The lessee is responsible for this rent payment for the duration of their tenancy. The idea behind this lease option is that, rather than the renter paying for costs such as taxes and insurance directly, the flat fee will pay all of the owner’s operating costs and any profit on top.
In a gross lease, real estate investors typically take on more risk. Offering a full-service lease in this way puts the burden of various landlord responsibilities and costs back onto the property owner. In many ways, it more closely resembles a residential lease.
Making Triple-Net Leases Work for You
Triple-net leases are one of the most popular types of agreements for commercial real estate, and for good reason: they safeguard the owner’s investment while simultaneously giving the tenant more freedom over how they use, manage, and maintain the property.
NNNs can financially benefit both parties — while the landlord gains a more stable and predictable cash flow, the occupant can reduce their overhead by taking ownership of the property’s expenses.
Triple-net leases may not be ideal in every situation, as evidenced by their numerous alternatives. However, they remain popular among all parties and may be the perfect choice for your next commercial leasing venture.
