What is a Triple Net Lease (NNN) and What it is Used For?
In this article, we discuss when and how a triple net lease (NNN) is used and compare it against a double and single net lease. We also explain what a bondable lease is and compare the difference between net and gross commercial leases.
A triple net lease, commonly abbreviated as NNN, is a leasing agreement where the tenant is required to pay for the three main expenses of a property on top of the base rent. In such an agreement, the landlord is not liable for property taxes, insurance premiums and maintenance costs associated with the property. Instead, these expenses are borne by the tenant.
When and how triple net leases are used?
A triple net lease typically applies for commercial leases, especially larger commercial properties such as office buildings or shopping centers with stable businesses as tenants.
While not a required condition of a triple net lease, the landlord may offer a lower rentalbecause of the additional costs incurred by the tenant. Triple net leases are usually longer, ranging from 10 to 15 years, with rent escalations incorporated into the contract so that the landlord is not disadvantaged by inflation.
In spite of the tenant’s responsibility towards making payment for the items in addition to the base rent, like property taxes, insurance premiums and maintenance, in a triple net lease, the payments would still have to go through the landlord, for tracking purposes. In addition, the landlord is ultimately held responsible for the payments, being the owner of the property.
Although the reduced cost to the landlord makes a triple net leases attractive to investors, such an investment is typically only available to accredited investors. However, retail investors may also invest in such properties indirectly through Real Estate Investment Trusts (REITs).
Read also: Definition of Institutional Investor
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Comparisons: triple net lease (NNN) versus double net lease (NN) versus single net lease (N)
The three major expenses associated with a property are property taxes, insurance premiums and maintenance costs.
In a single net lease, the tenant is responsible for only one of the main property expenses - property taxes, in addition to the base rent. However, such an arrangement is less common compared with double net leases or triple net leases.
With Double Net Leases, the tenant is responsible for both property taxes and insurance premiums, in addition to the base rent. Similar to a triple net lease, a double net lease is most commonly used in commercial leases.
The following table illustrates the difference among the three types of Net Leases.
| Type of Lease | What is Covered | When is it Typically Used |
|---|---|---|
| Single Net Lease | - Property Taxes | Commercial properties but Single Net Leases are the least common out of the three |
| Double Net Lease | - Property Taxes - Insurance Premiums |
Commercial properties such as: - Office buildings - Shopping malls - Industrial parks |
| Triple Net Lease | - Property Taxes - Insurance Premiums - Maintenance Costs |
Longer term leases (10-15 years) Larger commercial properties such as: - Office buildings - Shopping malls - Industrial parks - Buildings operated by large stable businesses |
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Bondable lease
A bondable lease is a subset of a triple net lease, in which the tenant takes responsibility for any issues arising from the whole property, which may include rebuilding obligations after any incident to the property regardless of the insurance cover, and paying rent even if the property is not habitable. Bondable leases cannot be terminated and are typically for a very long period of 10 to 25 years.
Read also: Key Considerations in Multifamily Real Estate Investment
Gross commercial lease versus net commercial lease
In any net commercial lease including single, double and triple net leases, the tenant is responsible for one or more of the property’s relevant expenses. However, in a gross commercial lease, it is the landlord’s duty to pay these additional expenses. The tenant is only responsible to pay rent to the landlord to lease the property. Thus, gross commercial leases often come with higher rental rates and limits the use of utilities or services. This limits excessive charges to the landlord and in the event the tenant overuses the utilities or services, the landlord will pass the overflow charges to the tenant.
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Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.