When it comes to real estate, a triple-net lease is just about the best lease structure you can find as a landlord. Why? Because in addition to their base rent and utilities, tenants under triple net lease agreements are responsible for paying a pro-rata share of the building insurance, real estate taxes and maintenance costs for the leased premises.
This proration is usually based on the square footage of the space being rented in relation to the size of the entire property. So, on top of its base rent, a triple net tenant occupying 35% of the space in a given property would be responsible for 35% of the property’s insurance, maintenance and property taxes.
Under a standard lease, the tenant pays a fixed rent amount, which the property owner takes as gross revenue before subtracting the cost of insurance, property taxes and maintenance in order to reach the net operating income (NOI) for the property. Triple net leases, on the other hand, offer commercial investors the ability to convert all the rent they receive into NOI because the other expenses are paid by the tenants.
When is a Triple Net Lease Used?
Triple net leases are most commonly associated with commercial properties and have the letters NNN prominently featured in the property listing or advertising materials. A list of properties you can expect to be available through triple net leases would include the following:
- Retail (strip centers, shopping malls, the commercial portion of mixed-use developments)
- Commercial (industrial parks, automotive repair, manufacturing)
- Office space
- Bars and restaurants
Why use Triple Net Leases?
The use of triple net leases offers a number of very tangible benefits to property owners and commercial investors. As discussed in the opening section, the first and perhaps most tangible benefit of triple net leases is that they pass property-related expenses onto commercial tenants. This drastically increases the property owner’s NOI. High NOI translates to higher revenue, higher return on investment and higher property value for property owners.
Additionally, while most residential leases only last for 1 year, triple net leases can be signed for terms of 5, 10 or even 20 years with prearranged rent increases. In some states, the maximum length of residential leases is capped, but this is rarely the case with commercial buildings and triple net leases. The longer terms and the opportunity to phase in rent increases offer landlords a tremendous amount of stability.
All of these obvious pros are unique to commercial properties with triple net leases, which makes them extremely popular with individual investors and real estate investment trusts (REITs) alike. Aside from debt service, the cost of insurance, maintenance and property taxes are the 3 biggest expenses (and threats to NOI) for property owners. So, whenever they can mitigate those expenses through the use of a triple net lease, they have what is basically a win-win situation. This is why a long-term triple-net lease is a property owner’s dream lease structure.
Other Types of Commercial Leases
Although triple net leases are extremely popular with landlords for obvious reasons, they are not the only type of commercial leases available. Even though the triple net lease structure is strongly preferred by most landlords, several other types of lease arrangements are available. A partial list of these arrangements includes:
The term gross lease is indicative of the fact that the rent paid to the landlord is gross revenue. Under a gross lease, the tenant pays a fixed rent amount to the landlord, who has factored the estimated cost of maintenance, taxes and insurance into the monthly rent. This means the tenant makes no additional payments to the landlord beyond the agreed-upon monthly rent, and it is up to the landlord to pay property expenses directly out of the rent received. Gross lease rates are typically higher than the base rent under triple net leases
Under a net lease, tenants pay a base rent and then a mutually agreed-upon proration of the additional expenses such as taxes, maintenance and insurance. However, net leases differ from triple net leases in several significant aspects.
First, the “net” amount the tenant pays toward landlord expenses is not based on the size of the property but only the arrangement between the tenant and landlord. Second, the “net” amount paid by the tenant may cover only some of the landlord expenses. For example, a net lease may only cover taxes or insurance or maintenance as a single line item. It may also just cover a percentage or portion of these expenses as opposed to the full amount.
Under a percentage lease, the tenant pays a base rent and an additional surcharge that is based on a percentage of the revenue generated by the space being rented. Base rents under percentage leases are usually lower, which allows commercial tenants a little bit more economic flexibility and cash flow to work with.
Frequently Asked Questions About Triple Net Leases
What is included in a triple-net lease?
Triple net leases include base rent, plus a pro-rata share of the property tax, insurance and maintenance for the space being rented. The individual tenant’s proportion of the triple net is typically determined by the size of the space it is renting in relation to the size of the entire property.
Is a triple-net lease a good idea?
This depends on a number of factors. For obvious reasons, landlords prefer triple net leases to gross or net leases. However, triple net leases can still be mutually beneficial arrangements for both parties.
Who pays for a new roof under a triple-net lease?
Under a triple net lease, the cost of a new roof is paid for by the tenants. The individual portion of the repair cost will be divided based on the amount of space each individual is taking in the property. For example if there are 3 commercial tenants under a triple net lease and 1 tenant is renting 50% of the property, the tenant with ½ the property will pay 50% of the cost of the roof while the remaining 50% will be split between the remaining 2 tenants.
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About Eric McConnell
Eric McConnell is a real estate writer with a years-long passion for the real estate industry and the desire to help everyday people learn more about real estate investing. He is a graduate of Pepperdine University, where he earned a BA in journalism.
After graduating, Eric embarked on a career in real estate where he spent over a decade as an agent for multi-family and commercial properties in Los Angeles. In his career, he’s worked on almost every side of a real estate transaction. He has represented buyers, sellers, property owners and renters and served as manager for commercial and residential properties.
In 2019, Eric started sharing his experience with the wider world as a writer. He got his start writing and editing real estate lessons for prospective licensees before joining Benzinga in 2021. Since then he has written a variety of real estate material ranging from investment platform reviews to covering and analyzing breaking news in the real estate industry. His work has been published by Yahoo News on numerous occasions.