What is a Triple Net Lease?
Triple net leases are a type of real estate rental contract. They are most often used for commercial real estate, although some may apply to some single-family rental homes. In a triple net lease, the lessee assumes responsibility for specific costs associated with the property. These costs break down to three specific areas: property tax, insurance, and maintenance or repairs. Because there are three cost categories associated with this type of lease, it is also called a net-net-net lease or an NNN lease.
In addition to paying these costs, the lessee also pays a set amount for rent each month. Typically, the landlord charges less rent for an NNN lease because they have fewer costs to cover.
Reviewing the lease contract
It is important to read through the lease before you sign it. If you need help translating legal terminology to plain English, you can ask an Expert for assistance. Each lease includes key provisions, such as
- The legal property description
- Beginning and end dates for the lease term
- Identification and contact information for both landlord and tenant
- Payment amounts and due dates
- Notice period for landlord alterations to the property
Several optional provisions may be included in the lease. For example, late fees and early cancellation penalties are found in this section. It may also stipulate the tenant’s allowed parking and storage space, or whether the landlord will provide furniture. Tenants may also be required to keep a certain level of insurance coverage, such as casualty or liability insurance.
Avoiding certain clauses
Make sure your triple net contract is not a bond lease or absolute net lease. These clauses provide the tenant with no legal protection if the property is destroyed, seized by the government or otherwise rendered unusable. Although the rent may be considerably lower, the risk is much higher.
Defining net lease types
Lease contracts are classified according to who is responsible for certain costs: the landlord or the lessee. Gross leases are at one end of the spectrum, with the landlord assuming all costs other than rent. Absolute net leases are at the other end, with the lessee assuming rent and all property costs. Here is how the spectrum breaks down.
In a gross lease, the landlord pays for property tax, insurance costs, and building upkeep. The landlord may also agree to pay utilities. The lessee is only responsible for monthly rent. Because the landlord figures in their costs when setting the rent, gross leases often carry the highest rental fees.
Single net lease
In a single net lease, the lessee pays property taxes in addition to monthly rent. The landlord is responsible for all other building upkeep and operating costs, including property insurance.
Double net lease
When the lessee signs a double net lease (NN lease), they agree to pay base rent, property taxes, and to maintain insurance on the property. The landlord assumes responsibility for building maintenance and property upkeep. A landlord may use a double net lease to attract tenants to an older building, where maintenance costs may be higher.
Triple net lease
The lessee is responsible for rent, maintenance, property taxes, and insurance for the duration of a triple net lease. There is one primary difference between an NNN lease and an absolute net contract. Triple nets may have built-in protection clauses that release the lessee under certain circumstances. For example, an eminent domain clause would kick in if the government claimed the property. The lessee would no longer be responsible for rent or property costs in that case.
Absolute net lease
An absolute net lease contains the same terms as a triple net lease, but without allowing for extenuating circumstances. For instance, a natural disaster could render the property unusable, but the lessee would still have to cover rent and property costs.
Benefiting from a triple net lease
A well-written NNN lease provides benefits for both landlord and tenants.
Most triple net contracts are long-term leases that last 10-15 years. Rent escalation is frequently built in to allow for inflation. Since the tenant is responsible for most of the variable costs associated with the property, landlord expenses are minimized. With the right tenant, triple net leases are a relatively stable, low-maintenance investment. For instance, a nationally known, reputable brand would be an ideal lessee.
Although an NNN lessee is responsible for several costs, good negotiation skills can provide benefits for both parties. For example, leasing a newer building can minimize repair and maintenance costs. Rent is often lower with a triple net lease. Capping or structuring rent increases can also help commercial tenants accurately forecast overhead costs. This is especially true with a long-term lease.
Becoming an NNN lease tenant
For a single tenant, a triple net lease can provide some control over variable expenses. For instance, you can shop around for insurance rather than relying on your landlord’s pick. When you share a property with other tenants, like in a strip mall, dividing expenses is not as cut and dry.
Landlords may divide up utilities and upkeep fees for multi-tenant commercial leases. Often, each business is assessed a percentage based on how many square feet their office or retail space occupies. On the surface, this seems fair. However, when one tenant uses much more electricity than the others, the remaining businesses pay more than their share.
There may not be a lot of wiggle room in your contract, especially if the remaining spaces have already been leased. You may be able to negotiate a break in another area, though. For example, you might ask for more parking space or lower rent in return for paying extra on utilities.
Becoming a triple net lease landlord
Although landing a noteworthy tenant often results in a good investment, having a single tenant still carries some risk. If the parent company goes bankrupt, you may be left with little recourse for collecting the remaining rent and property expenses.
You can diversify your risk with multi-tenant commercial leases, but there are still some issues to consider. It is easier to rent space that can be converted from one type of space to another with little effort. For instance, a doctor’s office requires subdivided space, privacy, and special outlets for medical equipment. It would be difficult to attract a clothing retailer to that type of space.
Investing in a triple net leased property
Triple net leases attract investors because they offer regular income with a low investment risk. Most portfolios consist of at least three fully leased, single-tenant commercial properties. Another appealing aspect is the lack of maintenance required. Because triple net provisions place responsibility for property costs on the lessee, investors do not have to manage day-to-day expenses.
Investing in commercial property with an NNN lease also provides tax savings. When the properties are sold, the resulting capital can be rolled into another triple net property tax free. This maneuver is called a 1031 tax-deferred exchange.
Investors must be vetted before they can back an NNN leased property. The financier must be accredited and meet one of the following qualifications.
- Net worth of $1 million, not including primary residence value
- $200,000 annual income, or $300,000 annual income for married couples who file joint tax returns
Investors who do not meet these qualifications may participate in a Real Estate Investment Trust (REIT). Triple-net REITs bring multiple investors together to back an NNN portfolio.
Triple net lease investments are not risk-free. It is important to assess the credit rating of any tenant. Because most NNN properties are designed for a single tenant, they are either fully occupied or empty. Many properties are sold near the end of the lease term. The new owner must have a team in place to handle the transition and acquire a new tenant or risk a non-returning investment. Make a note of stock analysis in addition to credit rating to get a complete picture of a prospective tenant’s finances.
Getting help with triple net leases
Triple net leases can range from simple to complex. In fact, some leases include provisions that can extend the agreement up to half a century. Leases are binding legal agreements, so it is important to know what you are agreeing to before you sign. If you need insight on triple net leases, ask an Expert. Whether you want to renegotiate lease terms or craft a sound contract, their years of experience can assist you in determining the right course of action.