What Is A Triple Net Lease? What To Know


Long term leases benefit landlords because there is less opportunity for vacancy and less turnover to worry about. Since the tenant pays all operating expenses under a triple net lease and the landlord is mostly hands-off, that means the financial strength and stability of the tenant matters. If the tenant can’t pay the bills, then this could create a distressed situation for the landlord, especially if a lender is involved. By taking the time to perform your due diligence, you can invest confidently in the perfect property for your business.

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Since the tenant is responsible for all operating expenses under a triple net lease, that means the property is relatively easy for the landlord to manage. That’s because the tenant will pay all operating expenses, which makes the investment turnkey for the landlord. Property taxes, insurance premiums and common area maintenance charges are, for the most part, outside the control of the tenant.

The complicated triple net leases and conditions often leave tenants and landlords mystified. However, reviewing an example can help you solidify your understanding. Triple net leases can be attractive investments for landlords, mainly because the tenant bears the responsibility of covering most unexpected expenses.

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Tenants also don’t have to keep up with when to pay property taxes and maintain a building insurance policy. While these categories don’t represent all of the rules surrounding commercial leases, they provide a general overview of what a lessee can expect to encounter with each type. Every individual contract is different and should be reviewed thoroughly. A common misconception with triple net lease investments is that they are almost risk-free. While triple net investments do offer several advantages, there are still several risks that should be taken into consideration. However, what the NNN lease ultimately achieves is that it shifts the responsibility, and therefore the risk, of paying the operating expenses from the landlord to the tenant.

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Commercial real estate leases tend to be a lot longer than residential leases (typically 5-10 years rather than 1-3 years). During these longer leases, the expenses of owning and managing commercial properties can rise substantially. In addition, as businesses grow, they often need to make changes to their space to accommodate more workers, new business lines, new technologies, etc. For these reasons, investors who own commercial properties prefer to structure their lease arrangements in such a way as to pass these expenses to the tenants.

What Does a Triple Net Rental Rate Include?

In some cases, especially on a large property, the Landlord may spit up the property to lease as two or more separate premises. If this is the case, the Landlord must solidify the percentage of floor space the Tenant is leasing based on the total floor space of the entire property under the Landlord’s control. Proportionate Share” will require a written report on what this percent is as well as a numerical entry.

However, the landlord may be responsible for the roof and the structure, and sometimes the parking lot. Investors in triple net lease investment offerings must be accredited with a net worth of at least $1 million excluding the value of their primary residence or $200,000 in income ($300,000 for joint filers). Smaller investors may participate in triple net lease real estate by investing in real estate investment trusts that focus on such properties in their portfolios. Where the latter transfers some operating expenses to the lessee, the former keeps all of them on the lessor.

However, there is a much more significant variation of opinion on this term from contract to contract. For example, some property owners require the tenant to obtain and maintain the necessary triple net insurance policies, and others may include provisions for separate insurance policies and obligations. The article below dives into triple net leases, how they work, and what terms yours should include for protecting your legal rights, property, and financial interests. The information below is a high-level overview of the triple net lease. For the landlord, it can be a reliable income source with fewer overhead costs.

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Before we proceed, any “Additional Terms And Conditions” that both Lessor and Lessee wish included directly in the wording of this document must be set before they execute this form. Additional Terms And Conditions” to record them exactly as both parties wish. If you need more room, you have the option of either inserting more lines for your use or continuing in an attachment. If there are no such additions then you may leave it blank or indicate that no additional terms exist. This document will need to include the subject of renewal to its definitions. Many agreements will enable the Tenant to continue their current lease either with or without additions to the rent.

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As you can see on the second proforma, the triple net lease in place provides additional reimbursement income that cancels out all of the operating expenses. A triple net leasing agreement also specifies tax obligations, and property taxes are the tenant’s responsibility under this arrangement. Every agreement is unique, so you will want to clarify this section to avoid future fines and penalties for non-payment of taxes. Gross leases have several advantages and disadvantages for both landlords and tenants. Landlords only need to quote is a single rate, which is relatively simple for tenants to manage. Tenants, however, cannot audit expenses, which means a landlord can cut corners to increase profit.

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If you’re looking for a new office location, consider applying for a commercial mortgage before you start your search. This section includes the amount of rent due each month or quarter, as well as any automatic rent increase mechanisms that may have a direct impact on the tenant’s financials. Types of net leases include single net, double net, and triple net leases.

Landlords rely on monthly rental payments to supplement their income, which means it’s critical to understand the amount agreed upon in the agreement and whether it will change over time. NNN agreements include fixed payments for the duration of the lease to ensure that you know exactly how to expect from your tenant every month or quarter. The major benefit of a triple net lease is that each tenant in a building pays their fair share of expenses. Expenses are paid directly by the tenant that incurred them, rather than totaled and divided among all tenants in a building.

When maintenance costs are higher than expected, tenants under triple net leases frequently attempt to get out of their leases or obtain rent concessions. It should be noted that the market rental rates will typically be higher for gross leases versus NNN leases to account for the higher expenses the landlord will incur. Although the out of pocket expense for a tenant will likely be similar with a gross lease and a net lease, a triple net lease shifts the risk of expense increases to the tenant and protects the landlord’s bottom line. The difference between a triple net lease and a gross lease is that in a triple net lease, the tenant pays all operating expenses. On the other hand, in a gross lease, the landlord pays all operating expenses. While this is generally true, the only way to actually understand who pays for what and when is to thoroughly read and understand the lease agreement itself.

This agreement also gives the tenant a vested interest in using the property responsibly and keeping up with routine maintenance. In addition to assuming costs otherwise reserved for the property owner, the lessee in a net lease is still responsible for making regular rent and utility payments. This lower rent reflects and counterbalances the additional burdens the tenant assumes in a net lease. A triple-net lease, also known as simply a triple-net or NNN, is a type of lease agreement on a property, most often commercial real estate. The double net lease isn’t as common as an absolute or triple net lease structure, but you can and will find these projects if you’re looking for investments.

So, as a renter, make sure you know what you agree to before signing on the dotted line in a triple-net lease. Triple net lease investments are a relatively low-risk way to generate a reliable income stream. However, rent increases are integrated into the agreement and often occur regularly throughout the lease term to reflect rising property values or anticipated growth in the area. Property owners retain all equity under a triple net building lease, even if the tenant makes approved upgrades and improvements.

With that, the landlord has a less active role in managing the property. Every commercial real estate lease falls along the spectrum, with an absolute net lease at one end and an absolute gross lease on the other. Most of them are somewhere in the middle and are called a hybrid lease. 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.

The triple net lease is a lease agreement structure where the tenant pays all of the operating expenses for the property. Therefore, they handle building insurance, property insurance, and real estate taxes on top of paying rent. The lessee agrees to pay rent, utilities, and all of the property’s operating expenses.

Many different types of commercial real estate leases are used by landlords. Understanding the various commercial lease types will lead to improved negotiations and help determine monthly expenses. Gross leases are when the landlord covers all costs, including taxes, insurance, maintenance, utilities, and even janitorial service.

Triple net leases tend to have lower rents because the tenant assumes ongoing expenses that would otherwise be the responsibility of the property owner. The critical difference between a triple-net and an absolute net lease is that a triple-net abdicates responsibility for three specific expenses . In contrast, an absolute net is broader and transfers all cost burdens to the lessees. So if you are looking to sign your first commercial lease agreement, you may not yet be ready to clear these requirements. If you’re looking to passively invest in real estate without any of the work involved in owning and running these investments, real estate investment trusts may be the way to go for you.

  • A NNN lease is most commonly used for commercial real estate transactions.
  • This makes it hard to define triple net lease precisely because it can take on slightly different meanings by different people in different markets.
  • In a single net lease, the tenant pays a lower base rent in addition to property taxes.
  • On the other hand, in a gross lease, the landlord pays all operating expenses.

She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies for financial brands. Now under new ownership, the property is set to become a mixed-use city center, bringing new life and energy to the community. Tenants are often responsible for their own HVAC units and storefronts, too, but typically don’t have to maintain the structural aspects of the property.

This is the opposite of what happens in the case of a gross lease, where the bulk of the risk is carried by the landlord. High rollover costs — no matter what type of lease you have in place for property, changing it comes with rollover costs. With a triple net lease, you can expect these costs to be higher than they would for a different type of commercial lease or a residential one. If you have a tenant in place for decades, you should be prepared to deal with a lot of wear and tear at the end of the lease, together with space and move-in ready for the next tenant. Long term leases — the typical commercial real estate lease is three to five years, but triple net leases can last for 25 years or more.

additional expenses

Under a ground lease, the landowner leases the land to the lessee which gives the lessee the opportunity to construct a building. Under a ground lease the tenant will typically pay for the same items they pay for under a Triple Net Lease or Bondable Lease. Generally, ownership of the building will revert to the landowner at conclusion of the lease.

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