A triple net lease, or NNN lease in real estate terms, is a type of commercial real estate agreement where the tenant assumes additional financial responsibilities as well as the predetermined rental rate on a commercial property. The different variations of net leases include single, double and triple net leases, which provide for a range of additional expenses covered by the tenant. Below is everything you need to know about triple net leases.
What are the features of a triple net lease?
In a triple net lease, also known as a net-net-net (NNN) lease, the tenant is required to pay all of the costs associated with property leasing in addition to the agreed-upon rent. These costs include real estate taxes, building insurance and maintenance fees. To account for these accompanying expenses, rent on a triple net property is typically lower than in a standard agreement. Triple net leases are commonly used for longer rental periods, with initial terms beginning at 10 years or more.
What are the advantages of a triple net lease?
Triple net leases provide value for landlords and tenants, as the tradeoffs offer several different advantages for both parties. Due to the longer lease terms, landlords and investors enjoy the simple, consistent and predictable stream of income with infrequent concern regarding lease renewals or rent adjustments. Landlords also avoid maintenance and repair work, which again evades irregularities in the investment. Additionally, these leases tend to involve reliable, quality tenants that contribute to overall property value. The investors can also benefit from the sale and exchange of the NNN property by deferring taxes, using a 1031 Exchange.
The tenants or business operators reap the benefits of significantly lower rent in exchange for assuming the added management responsibilities. Furthermore, business owners may find value in the ability to sell their property to an investor mid-lease while remaining in business as a long-term tenant.
What are the considerations of a triple net lease?
While triple net leases offer many benefits, there are also several things to consider before signing a NNN agreement. Investors should be wary of inflation when setting long-term rental rates, as average returns may be insignificant with little to no rental increases over time. Also, to ensure a worthwhile investment, the experience, reliability and reputation of the tenant should be carefully evaluated. Finally, it’s important for tenants to remember that the additional property expenses may outweigh the lower rent depending on taxes, insurance, and maintenance costs encountered throughout the duration of the lease.
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