Commercial real estate investors may find the terms of a triple net (NNN) lease agreeable to their goals. This lease agreement can help lower commercial investors’ risk and provide steady income while offering tenants a cost-effective solution.
Learn how the terms of a triple net lease can benefit you and what properties are eligible.
What Is a Triple Net (NNN) Lease?
A triple net (NNN) lease is an agreement where the tenant is responsible for major property expenses in addition to their base rent and utilities. Typical utility costs are electricity, water/sewer, gas, internet, telephone, cable, garbage, and recycling. The three main expenses in a NNN lease are insurance, taxes, and maintenance.
Property Taxes Are Included in a Triple Net Lease
Tenants assume all operating costs in the terms of a triple net lease, including the payment of annual property taxes. They must also pay for:
- Maintenance and repairs: the tenant pays day-to-day operating costs, routine cleaning and building maintenance, and any needed repairs.
- Building’s insurance: tenants must find and purchase insurance policies and are responsible for paying their monthly premium, deductible, and any claims. Depending on their circumstances, tenants may need to buy commercial general liability insurance or property and casualty insurance.
The Landlord's Responsibilities in a NNN Lease
The landlord is only responsible for their mortgage payments and expenses related to the building’s structural issues in a NNN lease. For example, the landlord pays for those repairs if a property has a problem with its roof, parking area, or an engineering issue.
The landlord may assume a small portion of the building insurance or maintenance costs for major utilities, depending on the terms of their lease. These terms differ from an absolute triple net lease, where the tenant assumes all risks and expenses of the property.
Benefits of a Triple Net (NNN) Lease
Rent in a triple net lease is generally lower than other lease types since the added expenses are not included in the base rent amount. NNN lease agreements typically have longer terms than other leases, offering tenants terms of 10 years or longer. Some triple net lease agreements have built-in rent increases so landlords can keep up with the market rental rate.
Tenants benefit from NNN leases due to their low rent and longer lease terms. At the same time, landlords benefit from having fewer financial and administrative responsibilities and having some of the property’s risks shared with the tenants.
Properties That Use Triple Net Leases
Triple net (NNN) leases are used in commercial property and cannot be used in residential real estate. Commercial real estate includes offices, industrial parks, grocery stores, retail spaces like malls, or manufacturing facilities.
Large residential properties are also eligible if used for rental income. A property is considered commercial if used for business activities or to generate profit.
This type of lease is most commonly used for retail properties and offices, where companies and property owners can benefit from its terms. These tenants provide a steady income for investors and can handle the management responsibilities required in the NNN lease. Many real estate investors enjoy the hands-off approach a triple loan lease affords them.