What is a (NNN)?
(NNN) refers to a triple net lease – as it is an agreement where the lessee is responsible for paying Rent plus three other substantial operating costs of commercial property
- property taxes,
- Insurance and
- Maintenance
It is commonly applied to commercial properties like single-tenant buildings or retail spaces since this leasing structure assigns most financial burdens to the lessee.
Characteristics of a Triple Net Lease
- The load on the Tenant:
The Tenant pays for property taxes, insurance, and maintenance.
The landlord usually does Major structural repairs, depending on the lease.
- Lower Base Rent
Because tenants pay extra expenses, the base rent is generally lower than in other leases.
- Long-Term Leases
Triple-net leases usually have longer terms, giving tenants and landlords more permanency.
How a Triple Net Lease Works
- Base Rent:
The Tenant pays the landlord a fixed base rent.
- Additional Expenses:
The Tenant separately pays property taxes, insurance premiums, and maintenance costs directly to the service providers.
- Lease Agreement:
Other terms are incorporated into the rental agreement; these express the mutual obligations of the parties concerned and possible expense caps.
Pros and Cons of a Triple Net Lease
Gains for Landlords:
- A lesser amount of Financial Liability: The Tenant bears the burden of operational expenses, lowering the landlord’s liability.
- Expected Income: Landlords get constant and predictable income with fewer variable costs.
Cons for Landlords:
- Tenant Dependence: The value of the property and maintenance are highly dependent on the Tenant’s ability to manage expenses.
Pros for Tenants:
- Control Over Costs: Tenants have direct oversight of property-related expenses.
- Lower Rent: The base rent is generally much lower than other leases.
Against Tenants
- More Responsibility: Tenants carry the burden of operating cost variations.
- Complicated Budgeting: It becomes confusing for property taxes, insurance, and maintenance.
Examples of Triple Net Lease Properties
- Retail Stores: Many chain retailers, such as fast-food restaurants and convenience stores
- Office Buildings: Sole-tenant office space often uses triple net leases
- Industrial Facilities: Warehouses and delivery centers often use triple net agreements.
Triple Net Alternatives
Two alternatives exist for a triple net lease: The landlord suffers all operating expenses, and the Tenant pays straight Rent. This is known as Gross Lease, and another alternative is Operating expenses, which are split between landlord and Tenant and are often negotiated on a case-by-case basis, known as Modified Gross Lease.
Conclusion
A triple-net lease offers financial and liability benefits to the landlords and the tenants. It reduces the landlords’ risks involving their finances but grants the tenant control of expenses over the property. However, for either party, the landlord or the Tenant, to know and realize whether or not this triple-net lease fits what they need, a real estate attorney or a financial advisor must be consulted to explain the implications of a triple-net lease clearly.
