What is a Triple Net (NNN) Lease?

A triple net lease (or triple net lease agreement) is a type of commercial real estate lease that requires the tenant to pay for property taxes, maintenance and operating expenses. In other words, in addition to paying rent, the tenant must also cover these expenses. A triple net lease is also referred to as a “Net-Net-Net” or “NNN” lease because it breaks down these expenses into three categories: Net operating expense, Net value lease, and Triple net. A triple net lease can be beneficial to building owners by encouraging prospective tenants to focus on the quality of the property and its operations rather than just the price of renting it. However, it can also make it more challenging for prospective tenants who are not able to meet the high standards imposed by a triple net lease.

What Are the Basics of a Triple Net Lease?

The basic terms of a triple net lease will differ depending on the specifics of each contract and the relative bargaining power of the parties involved. As a rule of thumb, though, a triple net lease will generally require the tenant to pay the following: – Net Operating Expenses (NOE): This is essentially a portion of the building’s operating expenses, but the specific items included in this category and their relative shares will vary by lease. In general, though, it will include expenses such as property management, repairs, utilities, and insurance. – Net Value Lease (NVL): Also known as “option consideration,” this is a lump sum payment due at the start of the lease. The amount will typically depend on the building’s current value and the term of the lease. – Triple net: This is an amount due to the building owner for all taxes, assessments, and public improvements associated with the property. This amount will generally be due quarterly in advance.

Why are NNN Leases Important?

One of the most obvious benefits of a triple net lease is that it can help real estate owners attract higher-quality tenants. After all, in order to cover these additional expenses, tenants will likely need to have a higher income and/or higher credit standards. Thus, a triple net lease can help you avoid “spraying and praying” with your lease offers by focusing your attention on a smaller pool of prospective tenants and screening them based on their financial strength. This is particularly important in the current commercial real estate market, where high demand has put pressure on landlords to lower their lease rates. As a result, a triple net lease can help you separate yourself from other landlords and attract a higher caliber of tenant.

How Does a Triple Net Lease Work?

A triple net lease is a type of lease that requires the tenant to cover certain expenses related to the property beyond the standard rent amount. A tenant will often be responsible for paying for the ongoing costs of maintaining the property, such as property taxes, insurance, and utilities, as well as covering major repairs. These expenses are usually determined as a percentage of the gross rent, meaning that if the lease specifies that the tenant must pay for 10% of the gross rent, then the tenant must pay 10% of the total amount of rent due each month. A triple net lease may include a few other responsibilities, as well. The tenant may be required to cover the cost of any capital improvements to the property, as well as the cost of any necessary tenant alterations. The lease may also require the tenant to pay the real estate broker’s commission.

Pros and Cons of a Triple Net Lease

One of the key advantages of a triple net lease is that it can help owners attract a higher quality tenant by requiring them to focus on the property’s operations and quality. However, it can also make it more challenging for tenants to secure financing because lenders will likely require a larger down payment given the risk associated with these higher expenses. Moreover, while a triple net lease can help owners attract a higher quality tenant, it can also make it more difficult for them to retain existing tenants. After all, it can be challenging for existing tenants to meet their monthly expenses without a significant increase in their income. On the other hand, a triple net lease can encourage owners to keep their properties in good condition by tying the rental income to the operational expenses. In this way, it can also reduce the risk of vacancy and the likelihood that the owner will need to use their reserves to cover the expenses.

Bottom Line

A triple net lease requires the tenant to pay certain operating expenses associated with the property in addition to the standard rent amount. This can help owners attract a higher quality tenant by requiring prospective tenants to demonstrate financial strength. However, it can also make it more challenging for existing tenants to meet the higher expenses. A triple net lease can help owners attract a higher quality tenant by requiring prospective tenants to focus on the quality of the property and its operations rather than just the price of renting it. However, it can also make it more challenging for existing tenants to meet the higher expenses associated with this type of lease agreement.