Triple Net Lease Agreements (NNN) and How They Work

If you’re an investor or landlord in the commercial real estate industry, you may have heard of a triple net lease agreement (also known as an NNN lease). This is just one of several types of commercial real estate leases, and it offers more control over expenses for tenants than other types of commercial lease agreements.

It’s important to understand the basics of triple net leasing so you can be confident in your knowledge before investing in commercial properties. That’s why we’ve compiled everything you need to know about the triple net lease meaning below.

What is a Triple Net Lease?

So, let’s start at the very beginning: What is a triple net lease?

NNN leases are a type of lease used for commercial properties. They differ from gross leases or other types of net lease agreements by giving control of all expenses to the tenant rather than the landlord. This means that the lessee has full responsibility for the property and its finances, paying for utilities and other property expenses while the landlord collects passive income through each month’s base rent.

Triple net leases are typically used when a single tenant occupies an entire building, but can be used in buildings with multiple tenants, who usually pay utilities for their unit/suite directly and split shared building costs like insurance, maintenance, taxes, etc.

How Triple Net Lease Agreements Work

Triple net leases come with different responsibilities than other types of commercial leases. In NNN properties, tenants are responsible for paying:

• Base rent
• Building insurance
• Property taxes
• Utilities
• Cleaning fees
• Maintenance and repair costs

This differs drastically from single and double net leasing, which require tenants to pay some but not all of the expenses on a property. For example, single net leasing includes paying base rent and property taxes, but the landlord is responsible for all other costs and expenses; double net leases are the same, except tenants are responsible for insurance, too. Landlords have more responsibilities and managing tasks in single or double leases—in a triple net lease, this burden falls completely onto the tenant.

To compensate the extra financial requirements, base rent for tenants is typically charged at a lower rate and lease terms are usually much longer (between 10-25 years).

Advantages and Disadvantages of NNN for Landlords and Tenants

No lease type is 100% good or bad—they all come with pros and cons that you should weigh carefully before investing or renting a commercial property. Below are advantages and disadvantages of triple net leases for both tenants and landlords.

Advantages

Tenants: In a triple net lease agreement, tenants have much more control over the lease and expenses that are paid for their business. This means that financial tasks aren’t left in someone else’s hands, and they have full transparency about what expenses are due at all times.

Additionally, tenants benefit from lower rent costs to offset the extra financial burden they take on with an NNN lease—and who wouldn’t want lower rent?

Landlords: Triple net leases are great for landlords because they are able to take a hands-off approach while the tenant manages the expenses for the property. As a landlord, you benefit from little to no responsibilities, as well as long-term financial stability from longer lease terms.

Disadvantages

Tenants: Over time tenants may experience higher expenses. Costs for property taxes and insurance premiums may slowly increase, costing you more in the long run. Additionally, any maintenance and building repairs fall to the tenant, meaning the cost of upgrades for a building they don’t own could be their responsibility.

Landlords: The biggest disadvantage of NNN leases for landlords is having to find a reliable, financially stable tenant who can handle managing and maintaining the property. Commercial tenants for a triple net lease can be trickier to find, meaning your potential for vacancies and lost income is higher.

Why Property Owners Should Invest in Triple Net Lease Properties

Triple net leases are a great option for investors and landlords due to their passive nature. While your incoming rent may be lower than an average lease, you’re free from the burden of managing real estate taxes, property insurance, and other financial obligations, allowing you to collect your rent each month with little to no involvement.

Along with this, longer lease periods allow you to have a steady stream of income for much longer than a typical lease, giving you financial stability for 10-25 years. Finding a tenant to fill your building can be an initial challenge, but once the lease is signed, you’re free to focus on the rest of your portfolio instead.

Finally, when you’re ready to sell the property and purchase a different one, NNN leases are great options for 1031 exchanges. If you sell an NNN property and purchase another NNN commercial property, you can defer your capital gains taxes by putting the sales proceeds into your new property. This allows you to diversify your portfolio without breaking the bank.

Conclusion

Triple net leasing is just one of many types of commercial leasing options, but it comes with many advantages that landlords and tenants should consider. With your new knowledge of the basics of triple net lease agreements, you’ll be prepared to search for your next commercial property with ease.

FAQs

How is a triple net lease different from other lease types?

Unlike single and double net leases, an NNN lease shifts all property expenses to the tenant, allowing the landlord to have a low-risk, passive role.

Who typically uses triple net leases?

NNN leases are most common for single-tenant commercial buildings (like retail stores, restaurants, or banks), but can also apply to multi-tenant buildings with shared expenses divided proportionally.

What expenses are tenants responsible for under an NNN lease?

Tenants must pay all expenses related to running the property, including base rent, property taxes, building insurance, utilities, cleaning, maintenance, and repair costs.

How long do triple net leases usually last?

NNN leases typically range from 10 to 25 years, offering long-term financial stability for landlords.

How is rent calculated in a triple net lease?

Tenants typically have a lower base rent in a triple net lease than in traditional leases to offset the tenant’s added financial responsibilities for taxes, insurance, and maintenance costs.