Triple Net Lease (NNN): What It Means and How It's Used

What Is a Triple Net Lease (NNN)?

A triple net lease (triple-net or NNN) is a lease agreement on a property where the tenant promises to pay all expenses, including real estate taxes, building insurance, and maintenance. These expenses are in addition to the cost of rent and utilities. NNNs are one type of commercial property net lease. A single net lease requires tenants to pay property taxes plus rent, and a double net lease typically tacks on property insurance.

Understanding Triple Net Leases (NNN)

In commercial real estate, a net lease is a contract in which the tenant pays a portion or all of the taxes, fees, and maintenance costs. A triple net lease requires that the tenant pay the building's property taxes, building insurance, and the cost of any maintenance or repairs over the lease term.

The rent in the triple net lease is generally lower than that charged in a standard lease agreement. The capitalization rate ("cap rate") is the expected rate of return on a commercial property. The cap rate, which is used to calculate the lease amount, is often determined, in part, by the tenant's credit rating.

Pros of Triple Net Leases

For tenants: The tenant controls the maintenance, upkeep, and appearance of the
property and has direct control over the costs they pay, such as electricity or water. They can also select the insurance carrier of their preference and can protest the taxes if necessary.

For landlords: A triple net lease provides a steady and consistent revenue stream. Utility expenses, repair costs, taxes, and property management are passed to the tenant.

Cons of Triple Net Leases

For tenants: The tenant assumes the risk of tax and insurance cost increases. The landlord might overestimate the operating costs when determining the rental price, which results in the tenant overpaying for some costs. Unexpected costs may arise during the time of occupancy.

For landlords: Finding good and reliable tenants willing to sign a triple-net lease can be challenging. Downtime between tenants could result in no rental income while the building is vacant. The tenant's financial strength and stability are key since they are responsible for operating expenses.

Investing in Triple Net Leases

Triple net leased properties are a popular investment vehicle for investors seeking steady income with relatively low risk. Triple net lease investments typically include a portfolio of three or more high-grade commercial properties fully leased by a single tenant with existing in-place cash flow.

The commercial properties could include office buildings, shopping malls, industrial parks, or free-standing buildings operated by banks, pharmacies, or restaurant chains. A typical lease term may last 10 to 15 years, with rent escalation.

The benefits for investors include long-term, stable income with the possibility of capital appreciation of the underlying property. Investors can invest in high-quality real estate without management concerns like vacancies, improvement costs, or leasing fees. When the underlying properties are sold, investors can roll their capital into another triple-net-lease investment without paying taxes through a 1031 tax-deferred exchange.

Triple Net Lease Example

The Bottom Line

A triple-net lease can be a good option for landlords and tenants. While landlords can hand off paying various property expenses, enjoy a stable source of income, and focus on their own business, tenants, on the other hand, may receive a lower monthly rent and maintain control of the property.