Triple Net Lease or NNN Lease

The term "triple net lease,” or NNN lease, is a type of commercial real estate lease agreement where the tenant pays a base rent to the landlord, as well as their own operating expenses directly to the service and utility providers. The "N" in NNN stands for “net of” or exclusion of certain expenses. These usually include utilities, property taxes, building insurance, and maintenance or repairs in common areas of the building - which is essentially the meaning of a triple net lease.

These are the six key elements of a triple net lease:

1.       Base Rent

2.       Utilities

3.       Real Estate Taxes

4.       Property Insurance

5.       Cleaning Expenses

6.       Maintenance Cost

These six elements are expenses one takes on when entering into a triple net lease. Your finances must be in order, and you must factor in all expenses to see if you can truly afford the property. A true triple net lease is often executed by tenants who occupy an entire building, although they can also be established in multi-tenant buildings. In a multi-tenant setting, landlords who offer triple net leases typically let tenants pay for in-suite utilities directly, and charge tenants a fixed amount to cover shared costs in relation to taxes, insurance, maintenance, etc. The triple net lease has pros and cons for landlords and their tenants.

Some pros for landlords are steady income, reduced operating cost, and flexibility. Landlords benefit from the consistent long-term income, fewer financial obligations, and the ability to transfer the lease to a new owner if the property is sold. While these are nice benefits for landlords, there is risk with NNN leases. The cons are tenant attraction, financial performance risk, and maintenance oversight. First, a landlord has to find a tenant that is willing to take on a triple net lease and can qualify. A landlords’ income is tied to the tenant’s business success or failure. If the tenant successfully finishes the lease term, then the landlord may face costs for property upgrades and repairs at the end of the lease. Given these considerations, landlords are encouraged to undertake thorough due diligence. Evaluating prospective tenants' financial health, assessing the property's current condition, and staying on top of market trends are essential steps to mitigate investment risks and ensure a beneficial agreement.

Tenants have their own pros and cons when taking on a triple net lease.  The pros are lower rent, control over maintenance, and direct expense management. Tenants take on some operating expenses, so they normally pay a lower rent. With control over the operating expenses, tenants have the power to select what service providers they want to use and manage. Since tenants have the ability to decide your own service providers, they can pay directly for their actual usage of utilities and services. While these perks and freedoms are benefits, there are some potential issues to keep in mind. The cons are expense variability, financial liability, and maintenance responsibility. Since tenants have control over operating expenses, they may face increases in cost for the utilities and services. During the tenant’s term they take responsibility for property damage and incidents which can be costly. Also, tenants are responsible for maintaining the property, and this obligation can lead to substantial expenses, particularly if the property is not adequately maintained. Carefully evaluating these risks is crucial for tenants considering a triple net lease. It's important to thoroughly analyze one's ability to manage these potential costs while considering business stability and financial planning. Both landlords and tenants need to diligently assess the terms and align them with their strategic objectives to determine if a triple net lease is the most suitable agreement for their situation.