A Triple Net Lease in Commercial Real Estate
This kind of lease often favors the landlord
A triple net lease is a commercial lease in which the tenant is pretty much responsible for paying everything associated with the property. You pay the taxes, insurance, and maintenance costs for the building, in addition to the base monthly rent. This type of arrangement is also known as a net-net-net or NNN lease.
A triple net lease is typically signed for a long term, 10 years or more. And rent increases are usually built in over the course of the agreement.
This kind of lease is commonly used for a single-tenant property, but it may also be used for a multiple-tenant property, with each tenant paying a portion of the common costs.
Disadvantages of a Triple Net Lease
When you enter into a triple net lease, you're effectively paying the costs of owning a property that you don't in fact own. You'll pay real estate taxes on someone else's commercial real estate. You'll pay to insure their property against fire or other damage, and you'll pay to keep it up to code and safe for you and your clients or customers.
Meanwhile, you have no opportunity to benefit from any increase in the value of the property. The tax and insurance costs generally go up from year to year. And while some maintenance expenses can be predicted and saved for, others can come out of the blue and shock you with a large bill.
In the event of a multiple-tenant situation, make sure you will not be responsible for covering the costs of unoccupied spaces if other tenants should move out.
Advantages of a Triple Net Lease
Your base rent should be significantly less under a triple net lease to compensate you for all the added expenses you're taking on. You can also be sure that a serious maintenance issue will be fixed within a reasonable time frame if you'll be the one taking care of it.
This type of lease can be an excellent situation for an investor who wants to buy commercial property and rent it out. For the investor, it's a largely hands-off ownership experience that could result in substantial passive growth if they hold onto the building long enough.
Gross, Percentage, Single Net, and Double Net Leases
There are four other kinds of lease a commercial tenant may encounter. Under a gross lease, the tenant is responsible for paying only a predetermined amount of rent.
Under a percentage lease, the tenant pays only rent, which includes a set amount (typically based on the square footage of the rented space) paid every month and an additional amount paid only when gross sales exceed a certain figure. For example, the agreement might state the tenant has to pay 5% of any gross sales above $250,000. If gross sales are $300,000 one month, the tenant must pay an extra $15,000 ($50,000 x 0.05) in rent.
A single net lease requires the tenant to pay for rent and property taxes, and a double net lease requires them to pay for rent, property taxes, and insurance.
The Bottom Line
Triple net leases almost always favor the landlord, and you should carefully negotiate them to try to limit how much your overall payments can increase each year. You may be able to keep the property owner responsible for certain big-ticket maintenance items—for example, a new roof.
Hire an inspector to examine the property to determine what shape it's in, what repairs may come due during the term of the lease, and how much they will cost. And ask an attorney with expertise in this area to help you negotiate and review the final contract.