Triple net leases, also referred to as an NNN lease, are agreements in which the landlord charges a low monthly rent to commercial tenants in exchange the tenant is responsible for covering three costs in addition to the rent: maintenance, insurance, and property taxes.
Triple net leases can potentially be a mutually beneficial way to structure a lease. However, both parties need to consider the pros and cons of these leases before moving forward with one.
Pros of a Triple Net Lease for a Landlord
Triple net leases have some potentially unique benefits for landlords. It’s important to be aware of them and weigh them against the cons to determine if this type of arrangement is suited for your situation.
Triple Net Leases Are Long Term
Triple net leases are long-term leases. A typical triple net lease duration is for ten years. However, they can last for 25 years or more.
Longer leases benefit landlords because tenants stay longer. As a result, there is less turnover to deal with, and vacancies are rarer than with short-term leases. Triple net leases eliminate one of the major headaches and costs that landlords endure, even though a triple net lease brings in lower revenue.
Triple Net Leases Provide Landlords Consistent Income
Triple net leases are longer-term, so landlords can expect tenants to keep renting for much more extended periods rather than having to keep searching for new tenants.
Additionally, triple net leases usually include a fixed rent increase over time. This means the property owner can expect to make some profit growth, even if there is a long lease term. No matter the case, the landlord has a consistent passive income source.
Low Costs and Responsibilities
With this type of lease agreement, landlords aren’t responsible for the upkeep of the buildings — that responsibility falls on the tenant. Tenants are responsible for paying the costs of taxes and property insurance and any construction costs or improvements needed to make the land useful.
Triple Net Leases Can be Transferred to Another Owner/Investor
Triple net leases are flexible. For example, a landlord can sell their interest in a property even if there is a current tenant. The tenant’s contract will be honored and transferred to be with the new owner. This means that if the investment no longer makes sense for the landlord, they can move on without a problem.
Triple Net Lease Cons for Landlords
Triple net leases can be an excellent option for landlords, but there are some cons to keep in mind as well.
With NNN leases, the landlord passes on the majority of the costs of the property to the tenant. As a result, the base rent the landlord charges is less.
Of course, there’s no hard cap on what a landlord can earn on a triple net lease, but since the tenant bears a lot of the costs for upkeep of the property, landlords should expect lower revenue than a more standard lease.
Difficulty in Finding Tenants
Tenants often don’t want to take the risk of signing a long-term lease, which can present challenges. Additionally, while the low rent may be attractive for potential tenants, they might not be too fond of the idea of having to pay for all the maintenance, insurance, and taxes that they would typically associate with the landlord paying.
If it’s an option, landlords may need to educate potential tenants on triple net leases.
When a lease expires, the landlord will have to invest money and resources to ensure the property is in good shape for the next tenant. Previous tenants may have let the property fall into disrepair, especially near the end of their contract, because they don’t have ownership of the property and have less incentive to do maintenance.
Rollover costs could mean spending a good deal of capital to repair and update the building for the next tenant.
Pros of Triple Net Leases for Tenants
Just as with triple net leases for landlords, there are attractive and unattractive aspects of triple net leases for tenants. Considering the tenant pays for maintenance, insurance, and taxes, the lessee pays less than the market rate for their lease.
The most significant benefit of triple net leases for tenants is the lower cost of the rent.
Suppose a lessee is renting a newer property that’s in good condition. In that case, a triple net lease may save them money overall, especially if the property stays in good condition throughout the lease.
Tenants directly pay the property’s utilities, which can also save them money compared to a standard higher rent that covers utilities and then some.
A triple net lease property has options common in attractive, busy locations.
Despite the costs of maintenance, insurance, and taxes, businesses that sign triple net leases are more likely to be able to use their location to their advantage.
Leverage in Negotiations
Businesses considering a triple net lease may be able to find specifics of the deal that allows for negotiating in their favor. A company can also use its creditworthiness to negotiate a lower rate.
More Control Over The Property
Tenants under a triple net lease have more control over the presentation and upkeep of the property. Tenants don’t have to rely on the property owner to make fixes in a timely manner. Additionally, tenants can choose what contractors to work with to make repairs and renovations.
Tenants have more control over improving the property in ways that they think will improve their bottom line.
Triple Net Lease Cons for Tenants
Although the low lease payments can be very attractive for tenants, triple net leases aren’t without cons.
Maintaining An Asset The Tenant Doesn’t Own
Property maintenance costs can add up, and it’s harder to justify these costs when it belongs to someone else. Landlords have every incentive to keep their property well-maintained, safe, and up-to-date. After all, they own the asset at the end of the day, and maintaining it will increase its value.
On the other hand, tenants don’t own the property and thus have much less incentive to maintain it as long as it meets their functional needs. As a result, maintenance costs are expenses for tenants rather than an investment, which a landlord would see a return on.
Unlike with standard leases where the tenant may pay just one bill to their landlord, there are many more responsibilities to keep up with under triple net leases.
Unlike the fixed rent payment, the costs associated with maintenance, insurance, and taxes may constantly be in flux. This can make it difficult for businesses to forecast this in their operating budget. Additionally, someone within the organization needs to ensure that all the bills get paid on time.
A triple net lease means all responsibilities of maintaining the property fall on the tenant, which can result in high unforeseen costs. The tenant is on the hook for these costs regardless of if the tenant was responsible for the property damage or if a natural disaster damaged it.
Unfortunately for the tenant, insurance won’t always cover these instances.
Even though triple net leases can offer tenants low lease payments, there can be unforeseen costs on the tenant. For example, any sort of damage to the property can cause a spike in maintenance costs, repairs, and insurance premiums.
Triple Net Leases Vs. Single Net Leases
Single net leases are less common than multi-net leases. With a single net lease, the landlord transfers less risk to the tenant because the tenant pays only the rent and property taxes. Any other expenses are the landlord’s responsibility, including maintenance and repairs.
Tenants pay less rent under a single net lease than a standard lease. Compared to a triple net lease, though, the tenant pays more in rent because they’re only paying the property taxes, whereas with a triple net lease, the tenant pays for maintenance and insurance in addition to property taxes.
In either case, the landlord is responsible for paying the property taxes on time, regardless of if the tenant pays for them or not. The landlord is also responsible for any penalties and other costs associated with the tax on the property.
Triple net leases involve a tenant paying a low rent in exchange for them being responsible for the common area, meaning, they have to pay for maintenance, insurance, and property taxes of a commercial property.
At first look, this arrangement may appear to favor the landlord heavily, but it can also be a good option for tenants under the right circumstances. So whether you’re a landlord or a business looking to rent a property, triple net leases are an option worth considering when negotiating your rental contract.