What are triple net, or NNN, leases?
Tenant costs under a triple net lease
- Base rent
- Net property taxes
- Net property insurance
- Net common area maintenance
- Other expenses, such as utilities
“Gross” and “net” leases bookend the spectrum of commercial real estate leasing arrangements.
With an absolute gross lease, the owner is responsible for all property expenses, while in an absolute net lease arrangement the tenant is responsible for these costs. Yet an absolute lease of any kind is typically not realistic. Commercial real estate leases are structured along the spectrum of leasing to reflect different balances of risk between owner and tenant.
The triple net lease — also known as an NNN lease — is one such iteration.
What is a triple net lease?
A triple net lease is a commercial lease arrangement where — in addition to base rent — the tenant is responsible for paying all of the property’s operating expenses, including net property taxes, net property insurance and net common area maintenance. Hence, the name NNN.
A triple net lease is usually illustrated per square foot. For example, a listing might read, “$50 NNN per square foot, per year,” meaning the annual base rent is $50 per square foot of the property, with an undesignated amount of net taxes, insurance and maintenance charged to the tenant on top of that amount.
Triple net leases can be applied to a single property or multiple properties, and with any number of tenants, though they are commonly single-tenant arrangements. Terms usually start at 10 years, with rent increases built in to the lease.
Many property listings use the terms “triple net,” “NNN” or “turnkey” to note that tenants are responsible for property costs rather than to identify a strict definition of expenses. As triple net arrangements can vary greatly, the lease outlines which parties are responsible for exactly what costs and how.
For example, some owners hire a property management company to oversee the real estate, the cost of which is then charged to the tenant or tenants proportionally. If the property is leased by a single tenant, the owner may ask the tenant to directly account for maintenance and management. Oftentimes, tenants are responsible for property expenses such as utilities, but not any legal or accounting fees that the owner may incur.
Any commercial real estate lease passes through the cost of taxes, insurance and maintenance to the tenant, either as part of the rent or an additional cost. Thus, a triple net lease does not necessarily mean that the lessee is paying more. A gross or net arrangement only transfers which party bears more risk when these costs change.
With a gross lease, the owner prices property costs into the rent. As property taxes, insurance and maintenance costs fluctuate, however, the owner bears the risk of those costs increasing beyond the amount charged within the rent. On the other hand, if costs are well managed or expenses fall, the owner makes a higher profit.
A triple net lease often has a substantially lower base rent because the tenant is responsible for other property costs. Although this gives the tenant more transparency and control over the property maintenance, they also assume the risk of increases in taxes or maintenance costs. Given the increased risk, triple net leases are common in particularly desirable locations where the tenant is willing to accept more volatility to access an in-demand neighborhood.
Investor advantages and disadvantages
Real estate investors often seek out NNN properties for sale because they generate predictable income with relatively little hands-on management required. Triple net leases are usually long term, and tenant turnover is a less frequent concern. Additionally, if investors decide to later sell the property, they can use a 1031 tax-deferred exchange to roll the revenue into another triple net lease, tax-free.
Triple net leases are excellent from an investor perspective, but there are a few risks. As investors often assume NNN properties with existing tenants, it is important to identify the re-leasing period before purchase so that the owner doesn’t risk acquiring a property with an outgoing tenant. Tenant credit risk is another potential concern as the occupancy risks are higher. If the lessee in a single-tenant lease goes bankrupt or moves out for any reason, the property becomes completely vacant.
Only accredited investors — those who meet the Securities and Exchange Commission’s net worth requirements — can acquire triple net lease property. Others can tap into triple net lease commercial real estate through real estate investment trusts (REITs) that exclusively invest in triple net leases.