What is A Triple Net (NNN) Lease?

What is the meaning of a triple net lease? A triple net lease is one of many types of rental agreements used in commercial real estate. It gives the tenant more responsibility by including expenses other than the rent in the lease. It is common in retail properties, industrial spaces and office buildings. In this scenario, you as the tenant take on much of the variable financial risk associated with occupancy.  This can be either through reimbursement of expenses paid for by the landlord or directly as the tenant.  If it is reimbursement, it will be based upon the percentage of occupancy in the property as those expenses/benefits would be shared by all of the tenants.  

Understanding this type of lease is important as it affects your overall costs and responsibilities. These details will help you budget accordingly. It will also help you understand your obligations, which can prevent disputes with your landlord.

What Is a Triple Net Lease?

A triple net lease means you as the tenant pay all non-capitalized property expenses which include the three following areas:

• Property taxes: The tenant pays the property taxes. You can estimate these using ROCK’s property tax calculator, noting this is based upon the tax assessment for the property..
• Maintenance: The tenant is responsible for the property’s maintenance and repair costs.
• Insurance: The tenant is responsible for insurance costs while they occupy the building, covering protection against flooding, fire or other risks.

These costs mean the tenant typically pays a lower base rent. Because the tenant handles these expenses, the landlord’s risk is reduced, and their property costs are more predictable.

Investors often buy stand-alone retail properties and issue a NNN lease because of the steady cash flow, especially when the tenant is a well-known and/or financially secure business.

Net Lease Variations

These leases may sometimes be labeled as single net (N) or double net (NN) leases. In an N lease, typically the tenant pays only the property taxes, and the landlord covers the other expenses. In a NN lease, the tenant covers the property insurance and taxes, with the landlord paying for the property’s maintenance. 

Triple Net vs. Gross Lease

NNN and gross leases are two of the more common types of commercial leases. The key difference between them is who carries the risk for the variable expenses.

A gross lease simplifies the tenant’s payment structure. The tenant pays a fixed rent, and the landlord covers the property’s operating expenses, such as maintenance, property taxes, property insurance, and frequently even utilities. It offers the tenant more predictability through stable monthly payments, as the rent does not change based on fluctuations in property costs. The landlord carries this risk instead. 

Here is how gross and NNN leases differ:

• Risk: Tenants in NNN leases face variable costs, while tenants with a gross lease have stable, predictable rent payments.
• Cost responsibility: In a gross lease, the landlord covers most of the property’s operational costs. In a NNN lease, the tenant bears most of these costs.
• Rent amount: Rent in a gross lease is higher as it includes many expenses. In a NNN lease, the base rent is typically lower as the tenant takes on additional costs.

What Is an Example of a Triple Net Lease?

If a retail chain like a fast food restaurant leases a stand-alone building, the NNN lease may be structured like this:

• Base rent: $5,000 per month
• Property taxes: $600 per month
• Insurance: $200 per month
• Maintenance costs: $400 per month
• Direct tenant expenses like utilities: variable

These fees bring the total monthly payment to $6,200 plus direct expenses. The landlord receives the base rent, but maintenance and property tax costs are subject to change with inflation rates or unexpected maintenance and repair responsibilities.

It is important to note that with NNN leases, both parties have the right to audit to ensure charges and expenses are calculated fairly, especially where tenants reimburse the property owner instead of paying vendors directly for maintenance expenses.

What Are Triple Net Lease Pros and Cons?

A NNN lease offers a unique approach to commercial real estate leasing, which offers significant benefits to landlords and tenants. However, this structure also involves some risks to the tenant with unforeseen circumstances or expenses. It is crucial to explore the pros and cons of this lease type, understand how it aligns with your business needs and learn how this lease structure can positively impact your operations.

	For Tenants	For Landlords
Pros	Tenants have control over their overhead. This control means they can manage and  potentially lower the costs associated with  property upkeep and insurance.	The structure of these leases give landlords a consistent stream of revenue by cutting out utility expenses, repair costs, property management and taxes.
	Tenants also have more freedom over how they want to handle property upkeep and enjoy a lower base rent.	In this scenario, the landlord enjoys property ownership with fewer day-to-day responsibilities.
Cons	Tenants carry the risk of unforeseen tax  hikes, or property repairs. There is a chance of overpaying for some of these expenses if the tenant can manage the expense more closely or self-perform (e.g. snow removal).	Landlords need reliable tenants who are willing to properly care for the property.
	The responsibility that comes with NNN  leases can make financial and administrative planning more challenging for tenants.

Trust ROCK With Your Commercial Real Estate Needs

Triple net leases are a growing part of commercial real estate, offering certain advantages to landlords and tenants. As a tenant, you will have a low base rent and more control over your business’s space. On the other hand, landlords have more predictable income and less hands-on property management responsibilities. Understanding this lease type’s terms and potential risks is crucial to all parties.

ROCK Commercial Real Estate is a full service commercial real estate firm. From brokerage to lease administration to property management and more, we aim to build relationships with our clients, offering valuable knowledge and solutions to their commercial property needs. Our team understands the importance of clear communication, accurate market information and a sound strategy. Whether you’re searching for a commercial space to rent or want to purchase a commercial property, ROCK is here to help.

Contact us today for more information on our services, or browse commercial properties for lease in South Central Pennsylvania or Northern Maryland.