What is a Triple Net Lease (NNN)?
An Essential Property Management Term
According to Investopedia, a triple net lease (also known as triple-net or NNN) is a lease agreement in which the tenant or lessee “agrees to pay all the expenses of the property, including real estate taxes, building insurance, and maintenance” in addition to the cost of rent and utilities.
Triple net leases are commonly used in commercial real estate, and these leases usually have lower rents since the tenant “assumes ongoing expenses that would otherwise be the responsibility of the property owner,” Investopedia states. This type of lease agreements are popular among investors looking for steady income with relatively low risk. It’s important to note that, while most expenses are the triple net tenant’s responsibility, the landlord may be responsible for the roof, structure, and parking lot of the building.
Since this type of lease agreement places almost all financial responsibility on the tenant, the monthly rent is the main negotiable aspect. The overall lease amount is calculated using the capitalization rate (or cap rate), which is the expected rate of return on a commercial property. The cap rate is partly determined by the creditworthiness of the tenant in most situations.
The Triple Net Lease in Practice
Typically, triple net lease investments “consists of a portfolio of three or more high-grade commercial properties fully leased by a single tenant with existing, in-place cash flow,” Investopedia says.
The commercial properties could be office buildings, malls, industrial parks, or free-standing buildings operated by pharmacies, restaurant chains, and banks. The typical triple net lease term is 10 to 15 years with contractual rent escalation built in.
Investopedia goes on to say that investors in triple net lease offerings are required to be accredited with a net worth of at least $1 million (excluding the value of their primary residence) or $200,000 in come ($300,000 for joint filers). Smaller investors can engage with triple net lease real estate by investing in real estate investment trusts with such properties in their portfolios.
Other Net Leases
There are two additional types of commercial net leases, Investopedia says:
- Single net (N): an uncommon commercial net lease, the landlord transfers a minimal amount of risk to the tenant in this type of agreement. Typically, single net tenants only pay the property taxes in addition to monthly rent and utilities.
- Double net (NN): this type of lease agreement is more common than a single net lease. In this situation, the tenant pays property taxes and insurance premiums in addition to rent and utilities. The maintenance costs fall solely on the landlord.
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