What is a Triple Net Lease?

A triple net lease, often abbreviated as NNN lease, is a type of commercial real estate lease agreement where the tenant takes on significant responsibilities beyond just paying rent. In a triple net lease, the tenant is responsible for not only the base rent but also for the expenses associated with the property, including property taxes, insurance, and maintenance costs. This means that the tenant is required to cover these additional costs on top of the base rent, hence the term "triple net."

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 net operating income (NOI). High NOI translates to higher revenue, higher return on investment and higher property value for 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:

Gross Lease

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

Net Lease

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 on the arrangement between the tenant and landlord. Second, the “net” amount paid by the tenant may cover only some of the landlord's 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.

Percentage Lease

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.

Is a Triple Net Lease Right for You?

The decision to enter into a triple net lease agreement should be made after a thorough evaluation of your financial goals, risk tolerance, and understanding of the local real estate market. Consulting with a real estate professional or financial advisor can help you determine if a triple net lease is the right choice for your investment portfolio or business strategy.

Frequently Asked Questions