A triple net lease (NNN lease) is a type of real estate lease where the tenant is liable for the property’s continuing expenditures, such as real estate taxes, building insurance, maintenance, and paying rent and utilities.
As the name suggests, there are three “Net” components in the lease. Each “N” stands for:
- Net Property Taxes
- Net Insurance
- Net Operating Expenses
The net operating expenses—also referred to as Common Area Maintenance (CAM)—include repairs and maintenance costs, trash removal, snow removal, landscaping, parking lot maintenance, security and fire safety, elevator maintenance, property management, exterior lighting, and other expenses required to operate the property.
What is a Tenant Improvement Allowance?
A tenant improvement allowance (TI) is an incentive landlords provide to entice renters to sign a lease. Typically, the landlord will give the tenant a dollar amount per square foot to construct their office, retail, or industrial space. Tenant improvement allowances help the tenant pay expenditures related to the property itself, such as paint, flooring, and wiring.
What are the Benefits for Tenants with a Triple Net Lease?
A triple net lease offers a cheaper rental rate than a regular lease since the landlord does not have to worry about most of the variable costs of owning the property (also called a gross lease). The landlord/owner estimates the amount of property taxes, insurance, and maintenance costs incurred over the lease period, and any savings go to the tenant.
We say the savings go to the tenant because if the landlord overestimates or builds profit into the operating expenses, the tenant is not required to pay the extra amount. Furthermore, if the property’s operational expenditures fall, the tenant will see a direct impact on their gross rent.
What are the Benefits for Landlords and Investors with a Triple Net Lease?
Triple net leases are popular among landlords and investors because they provide a consistent income stream. Property taxes and building insurance may vary yearly, and maintenance costs are the most unpredictable of all costs.
By asking the tenant to cover the variable costs, the landlord and investors know how much money they can anticipate each month. And, because these leases often span many years and contain built-in rent increases, landlords don’t have to worry about lease renewals or negotiating rate changes regularly.
One misperception about NNN leases for landlords and investors is that it covers all expenditures associated with a commercial property, which is not always the case. While an absolute NNN lease with a solid tenant covers all costs, some expenses will not be covered by the tenant(s). An NNN lease, for example, is unlikely to cover the accounting charges imposed by the landlord’s CPA or the legal costs incurred by the landlord’s attorneys when writing or reviewing papers. While these fees are generally minor compared to the purchase price, it’s worth noting they’re not typically covered by a regular “NNN lease.”
Risks of Triple Net Leases for Tenants
The tradeoff for a cheaper monthly base rent per square foot is that the tenant must be ready to accept the risk of the unknown. If a natural disaster causes severe property damage, the tenant is liable, not the landlord or investors. Additionally, there might be a system or equipment breakdown, such as when the HVAC system fails, necessitating a substantial investment in repair expenses or increased rent and utilities.
Before signing a Triple Net lease, you should consider these risks and possible dangers. However, this should not stop you if you believe the gross lease savings are worth the risk of being responsible for taxes, insurance, and operational expenditures.