What Is a "Triple Net Lease" in Commercial Real Estate?
Triple net leases often favor the landlord
A triple net lease is a commercial lease in which the tenant is pretty much responsible for paying everything. They pay all or part of the taxes, insurance, and maintenance associated with the use of the property. These fees are paid in addition to the tenant's regular or base monthly rent. This type of arrangement is also known as a "net-net-net" or NNN lease.
Why does the name represent? The tenant is typically responsible for paying the net amount of three major expenses in addition to their base rent: insurance, taxes, and maintenance. But this isn't to say that additional rent is limited to these things. The tenant effectively assumes all financial responsibility for operating expenses, both those that stem from their business and those that maintain the building.
Disadvantages of Triple Net Leases
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 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, your clients, and customers.
Meanwhile, the owner is the only one who benefits from the building's appreciation or increase in value. This can be an excellent situation for an investor who wants to buy commercial property and rent it out. It's largely hands-off ownership that could result in substantial passive growth if they hold onto it long enough.
Advantages of Triple Net Leases
Your base rent will most likely be less than it would be if you entered into something other than a triple rent lease, but in the end, the bottom line might be pretty much the same. You might enter into another type of lease for a base rent of $4,000 a month. The management company or landlord may agree to drop that to $2,000 a month under the terms of a triple net lease, but if the three add-ons total roughly $2,000 a month, you haven't really gained anything.
The Bottom Line
Triple net leases almost always favor the landlord, and you should carefully negotiate them to limit how much the landlord can increase NNN fees each year. You'll also want to make sure these fees and terms for an increase are clearly spelled out in your lease. If you make a mistake, you may be stuck with it for some considerable time, because triple net leases are typically for 10- to 15-year terms.
Beware of terms like "turnkey" in lease negotiations. This often means that the lease is triple net. Have your attorney examine your lease, because the true identity of triple net leases are often disguised by crafty landlords with hidden language.
When it comes to triple net leases, look before you leap. The financial consequences are too high.