ENGLISH (832) 930-3059 | SPANISH (832) 356-7254

Triple Net Lease: The Pros and Cons – Investopedia

Marcus Reeves is a writer, publisher, and journalist whose business and pop culture writings have appeared in several prominent publications, including The New York Times, The Washington Post, Rolling Stone, and the San Francisco Chronicle. He is an adjunct instructor of writing at New York University.
A triple net lease (NNN) helps landlords reduce the risk of a commercial lease. A triple net lease is one of three types of net leases, a type of real estate lease where a tenant pays one or more additional expenses. Net leases generally include property taxes, property insurance premiums, or maintenance costs, and are often used in commercial real estate. In addition to triple net leases, the other types of net leases are single net leases and double net leases.
A single net lease requires the tenant to pay only the property taxes in addition to rent. With a double net lease, the tenant pays rent plus the property taxes as well as insurance premiums. A triple net lease, also known as a net-net-net lease, requires the tenant to pay rent plus all three additional expenses.
Rents are generally lower with net leases than traditional leases—the more expenses a tenant has to bear, the lower base rent a landlord charges. But triple net leases are usually bondable leases, which means a tenant cannot back out because the costs—especially maintenance costs—may be higher.
Single net leases, which are often referred to as a net lease or an “N” lease, are not as common in the rental world. In a lease like this, the landlord transfers a minimal amount of risk to the tenant, who pays the property taxes. This means any other expense—such as insurance, maintenance and repairs, and utilities—are the landlord’s responsibility. The landlord is also responsible for any maintenance and/or repairs that must be done during the course of the lease within the property.
Tenants under a single net lease end up paying slightly lower rent than with a standard lease because of the added cost of property taxes. But a higher rental payment doesn't alleviate the landlord's responsibility for keeping these expenses up to date.
For example, a tenant may miss or make late payments to the municipality, which means the landlord is on the hook for them. These may result in fines and/or additional fees. That's why most landlords include the property taxes in the rent payments. They prefer that the payment passes through them so they know the taxes are paid on time and in the correct amount.
Double net leases, which are also called net-net leases or “NN” leases, are especially popular in commercial real estate. In a lease like this, the tenant pays property taxes and insurance premiums in addition to the rent. The base rent— payable for the space itself—is generally lower because of the additional expenses the tenant must bear. All maintenance costs, on the other hand, remain the responsibility of the landlord, who pays for them directly.
In larger commercial developments with more than one space available to rent, such as shopping malls and expansive office complexes, tenants may have different square footage than their neighbors. So landlords typically assign taxes and insurance costs to tenants proportionally based on the amount of space leased.
Just like the single net lease, landlords should have the additional payments passed on to them, so they can pay them to the municipality and insurance company. Even though the tenant's lease includes these payments, the landlord's name is on the tax and insurance bill, meaning they are ultimately responsible. By having the tenant pay these expenses directly to them, the landlord can avoid the problems associated with late or missed payments by tenants, which could result in extra fees.
The triple net lease absolves the landlord of the most risk of any net lease. This means even the costs of structural maintenance and repairs must be paid by the tenant—in addition to rent, property taxes, and insurance premiums. Because these additional expenses are passed on to the tenant, the landlord generally charges a lower base rent.
When maintenance costs are higher than expected, tenants under triple net leases frequently attempt to get out of their leases or obtain rent concessions. To preempt this from happening, many landlords prefer to use a bondable net lease. This is one kind of triple net lease that cannot be terminated before its expiration date. Furthermore, the rent amount cannot be altered for any reason, including unexpected and significant increases in ancillary costs.
Landlords may prefer to use a bondable net lease as tenants may try to get out of an expensive triple net lease.
Triple net leases may increase the tenant's operational expenses, and they may be on the hook for deductibles on insurance policies. They may also be responsible for any damages to the property that are not covered by the insurance company.
Most triple net leases are long-term leases lasting for more than 10 years, and they generally include concessions for rent increases.
Triple net leases offer both investors and tenants some unique benefits. However, there are some limitations to this type of commercial lease that both parties should consider before entering into a long-term triple net lease agreement. Although by-and-large, tenants in a triple net lease accept more financial responsibility than in other types of leases, they can also be advantageous for tenants in many ways.
A triple net lease is an agreement between a property owner and a tenant where the tenant pays property taxes, insurance premiums, and maintenance upkeep and repairs, in addition to a monthly rental fee of the building or space.
Most triple net lease agreements are structured to offer long-term tenant occupancy (upwards of 20 years). This is advantageous for landlords because it removes the risk and losses of a property sitting vacant between tenants.
Because the tenant is responsible for nearly all the costs associated with the property—from taxes and insurance to regular upkeep costs—a triple net lease agreement is a fairly low-risk investment for an investor.
A triple net lease can provide a consistent source of income for an investor. This type of lease is structured to include a consistent amount of rent each month over an extended period of time. Plus, the majority of unknown or catastrophic property expenses will be passed on to the tenant, helping to protect any risks in the investment.
Triple net lease properties are often added to investment portfolios as a conservative, low-risk strategy to create more equity. Additionally, investors may decide to sell the property when the market peaks, population spikes, or when they’re ready to use that equity in their next investment.
With a triple net lease, you don't have nearly the landlord responsibilities as a more conventional lease. With more time and money, an investor can pursue other ventures.
Tenants who agree to a long-term lease have the benefit of being able to create a recognizable and long-lasting location for their business.
Typically properties with triple net leases are located in accessible areas that are in close proximity to other popular businesses. This can help a tenant gain traffic and exposure from customers who visit other businesses in the vicinity.
Because tenants in a triple net lease are responsible for paying property taxes, they may be able to build these expenses into their business expenses and achieve some tax benefits for their business.
For landlords who are locked into a long-term lease, they lose the ability to increase the rent if property values in the area increase. In the long-term, this can limit earning potential.
There is always the risk that a tenant may default, even if there is a long-term lease and tenants have been thoroughly vetted. During the period that they are trying to fill the vacancy, investors can incur losses.
With a triple net lease, the tenant assumes responsibility for the operations and upkeep of the business location. In addition to the (sometimes) high expenses of running their business, tenants must also be prepared to finance the building operations and any unexpected expenses related to it. This can be a large financial burden, and tenants must have a strong credit profile in another to qualify for a triple net lease.
When the tenant becomes responsible for property taxes, they also become responsible for all the associated liabilities, including fines and penalties for late or incorrect tax remittance.
Pros of Triple Net Lease
Guaranteed, long-term occupancy
Low-risk investment
Reliable income stream
Create more equity
Reduced landlord duties
Lasting business footprint
Optimal location
Tax benefits
Cons of Triple Net Lease
Earning caps
Vacancy risks
Assuming property expenses
Tax liabilities
Many large, multinational companies that want brand uniformity opt for triple net leases. Walgreens is one example of a company that frequently agrees to triple net lease agreements. In 2019, Walgreens was the second-largest U.S. pharmacy by total prescription revenue. Walgreens specializes in prescription drugs and convenience shopping for household items. Walgreens opts for 25-year triple net leases.
When a company opts for a triple net lease, they absolve the landlord from any financial or physical responsibility whatsoever. They do their own maintenance, use their own vendors, order their own signage, pay for operating expenses, and capital expenditures. However, by agreeing to triple net leases, Walgreens can have its pick of prime retail locations. Walgreens stores are typically in excellent locations—1.5-acre lots on major corners in major retails areas.
Walgreens seeks out these corner locations for their premiere visibility. The company is considered an excellent tenant in the realm of triple net leases and a conservative investment for investors.
When entering any type of lease, the tenant must consider that their rent payments, whether they include additional expenses or notes, may increase. A landlord may up the rent because of legal increases permitted by local governments. But the rent may also increase because of property tax reassessments or increases in insurance premiums.
But there are alternatives. If given the option, tenants may want to consider signing a gross lease, which charges a flat rental rate. This amount covers the fee for the space, as well as any additional expenses that come with it. The landlord, therefore, retains the responsibility for paying property taxes, insurance premiums, and maintenance costs. They cover these costs by building them into the rent they charge their tenant.
For example, if the yearly rent is $10,000 and they estimate the additional costs to be $3,000, the effective rent they charge the tenant is $13,000 annually. While traditional leases are more common than net leases, they present more risk to the landlord, who must absorb any unexpected increases in the extra expenses. This is why some landlords prefer using a type of net lease, shifting some or all of this risk to the tenant. 
A modified gross lease is another alternative to a net lease. With a modified gross lease, the tenant pays base rent at the lease’s inception. Over time, the lease takes on a proportional share of some of the other costs associated with the property as well, such as property taxes, utilities, insurance, and maintenance.
For both tenants and landlords, triple net leases can offer some benefits. A tenant has more freedom with their structure; they can customize their space for more brand uniformity without the capital investment of a purchase. Another advantage is that these leases tend to be quite flexible: caps to tax increases, insurance increases, etc. For the landlord, triple net leases can be a reliable source of income and have very little overhead costs. The landlord also does not have to play an active role in the management of the property.
A net lease is a type of lease where the tenant pays a portion or all of the taxes, insurance fees, and maintenance costs for a property, in addition to base rent. Net leases are commonly used in commercial real estate. There are three main types of net leases: single net leases, double net leases, and triple net leases. When a tenant signs a single net lease, they pay one of the three expense categories: taxes, maintenance, and insurance fees. When a tenant signs a double net lease, they agree to pay two of the three expense categories. These leases are also called net-net leases. Finally, when a tenant signs a triple net lease, they are agreeing to pay all three expense categories. Triple net leases are also known as a net-net-net lease.
With a triple net lease, almost all responsibilities fall on the tenant. The tenant is responsible for paying rent, as well as all overhead costs associated with owning the property: taxes, insurance, operating expenses, utilities, etc. As a result, the base rental amount can become a key negotiating term. Because the tenant is taking on the risk of the landlord's overhead, they may be able to negotiate a more favorable base rental amount. Also, in some cases, tenants can negotiate what aspects of repair costs and/or utilities the landlord is responsible for.
There are various ways that the amount of a triple net lease can be calculated. Sometimes landlords will add up all the property taxes, insurance, maintenance expenses, and common area expenses for a building and divide the total by 12. This number is the monthly cost. This process is simplified when only one tenant is leasing a building. The monthly base rental amount is typically calculated based on a rate per square footage.
The tenant is responsible for most expenses related to a commercial property with a triple net lease. However, the landlord may be responsible for the roof and the structure, and sometimes the parking lot.
A net lease is a type of real estate lease—typically for commercial rental properties—in which a tenant pays one or more additional expenses. There are three basic types of net leases: single, double, and triple net leases. With a triple net lease, the tenant promises to pay all the expenses of the property, including real estate taxes, building insurance, and maintenance. These payments are in addition to the fees for rent and utilities. Triple net leases sometimes have a lower base rent charge because the tenant assumes more of the expenses for the property. Net leases can be compared to step-up leases or ground leases.
With a step-up lease, future price increases through the life of the contract are established in the rental agreement. In long-term leases, step-up leases protect landlords from the risks of inflation or a rising market. Ground leases permit tenants to develop a piece of property during the lease period. Then, after the lease period is over, the land and all the improvements are turned over to the property owner/landlord.
Drug Channels. "The Top 15 U.S. Pharmacies of 2019: Specialty Drugs Drive the Industry’s Evolution." Accessed Dec. 30, 2020.
Westwood Net Lease Advisors. "What Is A Corporate NNN Lease & How Do Landlords Benefit?" Accessed Dec. 30, 2020.
Up Counsel. "4 Key Points Tenants Must Know About Triple-Net Leases." Accessed Dec. 31, 2020.
Ground and Space Partners. "How to Calculate a Net Lease." Accessed Dec. 31, 2020.
Area Development. "A Commercial Tenant's Guide to Lease Terms." Accessed Dec. 31, 2020.
Home Ownership
Corporate Finance & Accounting
Real Estate Investing
Deductions & Credits
Real Estate Investing
Home Ownership

source

Leave A Reply

Subscribe to our newsletter and promotions