NNN: Triple Net Lease
NNN
NNN Meaning
NNN is the widely-used industry shorthand for Triple Net Lease.
Triple Net Lease Meaning
What Is a Triple Net Lease?
A triple net lease, sometimes written as simply triple-net or NNN, is a common lease structure in Commercial Real Estate that stipulates that the tenant (or lessee) is responsible for paying all of the expenses of the property (in addition to the base rent and utilities), including costs such as taxes, property insurance, and any maintenance costs. Each “N” (or “Net”) represents one of the following areas: Property Taxes, Insurance or Operating Expenses (OpEx). Operating expenses, sometimes referred to as Common Area Maintenance (CAM), accounts for all of the expenses it takes to operate the property including repairs, maintenance, trash removal, snow removal, landscaping, parking lot maintenance, property management, exterior lighting, etc.
A triple net lease, while a popular leasing structure, differs from the more standard commercial lease agreement, where the landlord is the one responsible for making some or all of these payments. NNNs are actually the last tier of three types of commercial property net leases. There is also a single net lease which adds the payment of property taxes to the tenant’s base rent and utilities, and a double net lease which adds both property taxes and property insurance to the base expenses the tenant is responsible for. When paying a triple net lease, The tenant usually pays with one check (or one transaction) that is broken into two portions. The payment is typically divided into the base rent portion and the NNN portion
Benefits of a Triple Net Lease
Triple net leases can offer some benefits for both the landlord and the tenant. With a triple net lease, the tenant typically has more freedom within their space to make alterations and customizations without having to make a huge capital investment in the form of a property purchase. The tenant is also able to negotiate a cheaper base rent, leveraging the added NNN responsibility to their benefit. Another advantage is that these leases tend to include some protections against tax and insurance increases, with caps placed on certain values. In some cases, tenants are even able to negotiate specific aspects of repair costs and/or utilities that the landlord is responsible for.
Landlords benefit from triple net leases because they are a low-risk, reliable source of income that has miniscule overhead costs. In most triple net lease scenarios, the landlord doesn’t even have to worry about the daily management of the property. The NNN structure makes almost all responsibilities fall on the tenant. The tenant takes on the typical landlord responsibilities of paying rent, taxes, insurance, operating expenses, utilities, etc.
Related Questions
What is a triple net lease in commercial real estate?
A triple net lease stipulates that the tenant is responsible for paying for insurance, property tax and common area maintenance (CAM) expenses along with the rent. Triple net leases are sometimes abbreviated to NNN in a property listing. Triple net leases are not very common. They are used by landlord’s looking to reduce their risk. They are usually used on high-grade commercial properties leased to a single client. Lease terms may be between 10 and 15 years with a predetermined escalating rent.
A triple net lease, sometimes written as simply triple-net or NNN, is a common lease structure in Commercial Real Estate that stipulates that the tenant (or lessee) is responsible for paying all of the expenses of the property (in addition to the base rent and utilities), including costs such as taxes, property insurance, and any maintenance costs. Each “N” (or “Net”) represents one of the following areas: Property Taxes, Insurance or Operating Expenses (OpEx). Operating expenses, sometimes referred to as Common Area Maintenance (CAM), accounts for all of the expenses it takes to operate the property including repairs, maintenance, trash removal, snow removal, landscaping, parking lot maintenance, property management, exterior lighting, etc.
When paying a triple net lease, The tenant usually pays with one check (or one transaction) that is broken into two portions. The payment is typically divided into the base rent portion and the NNN portion.
What are the advantages and disadvantages of a triple net lease?
The advantages of a triple net lease include more freedom for tenants to make alterations and customizations without having to make a huge capital investment in the form of a property purchase, the ability to negotiate a cheaper base rent, protections against tax and insurance increases, and in some cases, the ability to negotiate specific aspects of repair costs and/or utilities that the landlord is responsible for.
The drawbacks of a triple net lease include higher monthly costs as opposed to those in double or single net lease structures, the tenant becoming responsible for taxes and any tax-related liabilities such as fines and penalties, earning caps which can result in a loss on future earnings if property values rise, and the risk of a default and vacancies which can cause additional cash flow issues for investors.
What are the common terms of a triple net lease?
A triple net lease stipulates that the tenant is responsible for paying for insurance, property tax and common area maintenance (CAM) expenses along with the rent. The tenant usually pays with one check (or one transaction) that is broken into two portions. The payment is typically divided into the base rent portion and the NNN portion. Lease terms may be between 10 and 15 years with a predetermined escalating rent.
The tenant is responsible for paying insurance and property taxes on top of the rent. The amount paid for insurance and property tax can be split pro rata in a shared property, like a mall. As the tenants are taking on more financial responsibility, they can negotiate for lower rent.
What are the tax implications of a triple net lease?
The addition of property taxes to the borrower’s expenses may even lead to some tax benefits for the tenant. NNN leases also tend to come with protections against tax and insurance increases with the inclusion of caps placed on certain values.
Should any of the three expenses (insurance, property tax or CAM) increase then the landlord will not have to absorb the cost, which would affect the properties profitability.
What are the risks associated with a triple net lease?
Triple net leases, though popular in commercial real estate, aren't without a few drawbacks. The main concern for a tenant is the higher monthly costs as opposed to those in double or single net lease structures. Furthermore, since tenants become responsible for taxes, this puts them on the hook for any tax-related liabilities such as fines and penalties.
As for landlords, triple net leases certainly reduce overhead costs — but there is a risk of reduced long-term earnings. Earning caps, which are commonly found in many triple net lease agreements, prevent a landlord from increasing rent prices beyond a set point. This can result in a loss on future earnings if property values rise.
Even though most triple-net tenants are heavily vetted, the risk of a default still exists — and vacancies can cause additional cash flow issues for investors who would face costs that tenants normally pay. Additionally, in some cases landlords may still be responsible for the roof and structure of the property, which can be quite costly should repairs be necessary.