The Triple Net Lease in Commercial Real Estate
Tenants are responsible for additional expenses over and above base rent
A triple net lease—sometimes referred to as an NNN lease, a net-net-net lease, or an absolute net lease—is a commercial leasing term that refers to a situation in which the tenant pays virtually all the operating expenses associated with maintaining the property he's renting.
This type of lease structure is used extensively in commercial real estate. It's very common with single-tenant properties, but triple net leases are also often used in retail spaces.
Gross vs. Net Leases
A gross lease is one in which the landlord takes full responsibility for most expenses associated with a property, excluding the tenant's personal utilities and insurance. Most residential leases are gross leases and some even include heat and hot water in the rent.
Net leases can be divided into three categories: single net, double net, and triple net.
Net lease expenses payable by the tenant are typically divided into three categories: property taxes, insurance, and common area maintenance. The tenant would pay for one of these costs in a single net lease, and two of them in a double net lease. The tenant takes on responsibility for all three in a triple net lease.
What's in a Name?
Most absolute net leases are not triple net leases in actuality. An absolute net lease generally passes on every imaginable expense to tenants, including those for major repairs or maintenance issues that might be simply the result of a building getting old. A triple net lease does impose a few limits on what the tenant must pay for.
A tenant in an absolute net lease arrangement might find herself paying rent even after the building has been destroyed or rendered uninhabitable after a fire or a natural disaster. But even a bona fide absolute net lease doesn't cover every imaginable expense. Accounting and legal expenses that benefit only the landlord are not typically passed on to the tenant.
Triple Net Lease Expenses
The tenant in a triple net lease pays for all three categories of expenses on top of his base rent, as well as his own personal insurance premiums, utilities, and for things such as janitorial services.
Common area maintenance includes operating expenses and utilities associated with these areas. In cases of retail space where there are several NNN tenants, the costs for these areas are typically prorated based on the percentage of the overall building they occupy. For example, a tenant who leases just 500 square feet of a 10,000 square foot building would be responsible for only .05 percent of these costs.
The landlord might estimate or average these expenses and charge them going forward on a monthly basis, or they can be payable as they're incurred. Sometimes it's a combination of both. Property taxes and insurance can typically be anticipated, whereas spikes in maintenance expenses or the cost of repairs might come as a surprise. Triple net leases can, therefore, fluctuate from month to month.
How Much Is the Rent?
Fixed rent is typically less with a triple net lease. In fact, if the building is a newer one, tenants might find that a triple net arrangement is preferable to other choices. The triple net tenant who's just establishing her business in a new building can enjoy lower rent and expenses during her first few years.
What's in It for the Landlord?
A triple net lease affords the landlord the advantage of not having to foot the bill for tenants who are wasteful of utilities or rough on their spaces, thus requiring more than average in the way of maintenance and repair costs. The tenants must be more careful and watch their expenses in this type of lease. The landlord doesn't have the aggravation and expense of dealing with repairs that can be chalked up to a tenant's negligence or misuse.
These leases also tend to be long-term as well, for as long as 10 years or even more, so the landlord won't find herself having to renegotiate the lease or find a new tenant as often.
The Risks for Tenants
The flip side that is that the tenant can end up footing ongoing expenses that are higher when an older and less efficient structure hasn't been renovated for a while and needs some work.
Tenants tend to be resistant to triple net leases because they have no control over increases in expenses. This makes budgeting their costs more difficult. This is especially true when it comes to repairs and maintenance.