The Triple Net Lease(NNN)-You Should Know

The Triple Net Lease(NNN)-You Should Know

In the case of a large building that has a lot of tenants, commercial real estate leasing contracts can become quite complicated. Confusion can come especially when the term triple net lease is in use. However, the fact of the matter is that it is not that complicated. In simple words, it can be explained as shifting of some the costs of owning a building onto the tenant/tenants. Yes, the tenant assumes more risk, but the major benefit of this triple net leases is that it can reduce the cost of rent for the tenants involved.

What do you mean by Triple Net Lease?

NNN or triple net leases can be explained as a leasing or rental contract where the lessee or tenant will pay for all the expenses of the building or property. Typically, it will include building insurance, real estate taxes, and maintenance. For all purposes and intents, it happens to be an agreement where it is the tenant that acts as an owner of the building in all but name. So, the tenant will be responsible for the building and go about as if they are the owner of the property.

In commercial real estate, triple net leases are mainly used. It can also be applied to building with multiple tenants. Because of this type of lease, insurance, taxes, and maintenance are all spread out among the different multiple tenants. As a result, it can reduce the risk as well as the cost for the tenants.

Characteristics of triple net leases

Generally, this type of lease is often used for freestanding commercial buildings that usually have a single tenant. But it can be used for other property types as well. Triple net leases usually have an initial term of ten years or more. Here it should be mentioned that often it has rent increases built-in.

Is it a smart move to go for NNN?

From the tenant's point of view, this type of lease has a primary benefit of lower leasing costs. This is mainly because the tenant either has to pay in full or just pay the property taxes, maintenance, and insurance. As a result, the upfront costs for the tenant will be much lower.

On the other hand, for the landlord, this lease will reduce of cost of owning the building. It will also create a somewhat predictable income stream. The cost of maintenance is completely unknown but the cost of insurance and taxes remain somewhat consistent and will increase each year. So, when you are passing these costs off to the tenants, the landlord can estimate what income they can expect to receive from renting out the property in question.

Disadvantages of Triple Net Lease

For a tenant, this lease does carry some risk. The insurance and property taxes are important but are generally fixed to a certain degree, at least in any given year. But no one can estimate the exact maintenance cost. This is something that the tenant has to confront.

The maintenance cost considerably could vary from year to year and could be considerable. Thus, it is best for prospective tenants to factor in the condition of the building when dealing with this type of lease.

What does Triple Net Lease include?

Triple net leases are mainly long-term leases which could be as long as ten years or more in many other cases. Commonly, it includes the tenant paying all or part of the costs of maintenance, insurance, and property taxes for the building. In the case of larger commercial buildings with multiple tenants, they might also pay for:

  • Security system
  • Parking lots
  • Common areas
  • Utilities, etc.

An inflation guard may be built into the contact to reflect rising costs.

What does the landlord have to pay?

Landlords are still the owner of the building. So, in case there is no tenant, the landlord has to pay for any repairs needed. They also have to pay for minor repairs that the existing tenant did not pay for. Here it should be mentioned that some leases will allow the landlord to fix any required maintenance issue themselves and then pass the bill on to the tenants.

How is Triple Net Lease calculated?

To calculate triple net lease, one has to take into consideration multiple factors like:

  • Insurance
  • The annual Property tax amount
  • Square footage of the building, and
  • The average or expected maintenance cost of the past few years.

Simply add the numbers up and then divide it by 12 to get the estimated monthly amount. You have to add this amount to the tenant's rent charge.

Reference Links:

https://www.investopedia.com/terms/t/triple-net-lease-nnn.asp

https://smallbusiness.chron.com/advantages-disadvantages-triple-net-lease-36261.html

https://nnnpropertiesgroup.com/client-resources/faqs/