A “Triple Net Lease”, or NNN lease, is a standard type of lease for commercial real estate (CRE). Learn what NNN means in a commercial real estate environment, how this kind of commercial lease differs from other lease arrangements, and what the advantages of leasing a triple net property are.
What is a Triple Net Lease (NNN)?
“Triple net lease” is known as “NNN” in real estate. A triple net lease, at its heart, is a style of commercial lease agreement that specifies that the lessee, in addition to paying the basic rent, is also liable for paying specific operating expenses related to the property.
These operational costs typically fall into three distinct categories, or “nets,” with a triple net lease, as follows:
- Real estate taxes
- Property insurance
- Operating expenses
In this situation, the base rent and the NNN charges are often divided into two separate parts of the monthly rent, even though the lessee will only give the landlord one check.
The stated monthly rent on a commercial lease is referred to as the base rent. Additionally, it is the bare minimum monthly rent that the tenant will be expected to pay. NNN costs, meanwhile, make for an additional amount that is intended to cover the three kinds of fees mentioned above.
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How to Calculate NNN?
In a business lease, a flat cost per square foot is used to determine both the basic rent and any NNN charges.
Consider renting a 1,200-square-foot office space at a $30 per square foot a year base rental rate and a $15 per square foot a year NNN rate.
Base rent: $36,000 per year for 1,200 SQFT at $30 per SQFT.
NNN costs: 1,200 SQFT multiplied by $15 per SQFT equals $18,000 annually.
There would be a total annual lease payment of $54,000, or $4,500 per month.
NNN Leases vs. Other Commercial Real Estate Leases
Despite being a typical lease arrangement, the triple net lease is simply one kind of CRE lease. The various categories of commercial leases are briefly described here to help you consider the lease agreement format that is right for your property.
In a gross lease, also referred to as a “full-service lease,” the lessee is only charged base rent. With this kind of lease, the landlord consents to pay for almost all building-related operational costs, such as maintenance costs, real estate taxes, and building insurance.
Modified Gross Lease
A modified gross lease sits in the middle of net leases and gross leases. In this situation, the tenant often consents to pay the base rent, utilities, and a percentage of their expenses. The specifics of what each party must pay will depend on the terms of each lease, but normally the tenant’s payment is determined by the proportion of the building they occupy.
A “single net lease” is usually referred to as an “N lease.” A single net lease requires the lessee to cover basic rent and real estate taxes. In this case, the landlord is responsible for covering all running costs for the duration of the lease, including property insurance.
As you might have guessed by now, a “double net lease” is called an “NN lease.” In a double net lease, the tenant pays for the base rent, building insurance, and property taxes, while the landlord is still in charge of covering maintenance costs.
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Absolute NNN Lease
In an absolute NNN lease, the tenant pays all expenses related to maintaining and running the facility, including major repairs. This kind of business lease is uncommon and is typically only used when there is just one tenant in the property, with good credit and a proven track record. It should be noted that the base rent for an absolute net lease is typically much lower to reflect all the additional expenses the tenant must bear.
The way percentage leases operate differs slightly from other commercial leases. A percentage lease requires the tenant to pay the landlord a portion of their gross revenue in addition to the base rent.
This kind of contract is more common in commercial leases where the property takes up a portion of a larger space. Major retail venues, such as malls and shopping complexes, typically use it with their tenants, such as stores, restaurants, and cinemas.
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Benefits of an NNN Lease
For the property owner, the main advantage of using a triple-net lease is assuming less financial risk. The only obligation the landlord has in a triple net lease situation is to perform significant repairs. The tenant is responsible for paying all taxes, real estate insurance premiums, and operational costs. The property will also be easier to manage overall, and the landlord would need less cash on hand with fewer bills to pay.
Entering a triple net lease entails greater responsibilities for the tenant. Yet, there are still certain advantages to entering this kind of lease contract. Landlords frequently provide certain benefits in exchange for the tenant bearing the NNN costs. For instance, the landlord could cut the base rent or provide credit for tenant improvements.
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Many benefits that make NNN leases attractive to landlords also make them attractive to CRE investors. With a triple-net property lease, the tenant must cover all property taxes, insurance, and maintenance costs. So, at the end of the day, there are fewer obligations than there are with other types of leases. This increases the returns for the investor. In addition, these types of leases involve less risk and make them a safer investment.
NNN Assets on SecondRE
NNN leases mean the tenant agrees to pay the property expenses, such as real estate taxes, building insurance, and maintenance, in addition to rent. These are leases that typically have higher returns for investors.
Many CRE assets on SecondRE Marketplace require tenants to sign NNN leases.
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