When entering into a new lease agreement, it’s important to know all aspects of your lease. In this post, we’ll cover Triple Net or NNN. What is it, and why does it affect your lease cost?
What Is a Triple Net Lease (NNN)?
A triple net lease (triple–Net or NNN) is a lease agreement on a property whereby the tenant or lessee promises to pay all the expenses of the property including real estate taxes, building insurance, and maintenance. These payments are in addition to the fees for rent and utilities, and all payments are typically the responsibility of the landlord in the absence of a triple, double, or single net lease.
Understanding Triple Net Lease (NNN)
If a property owner leases out a building to a business using a triple net lease, the tenant is responsible for paying the building’s property taxes, building insurance, and the cost of any maintenance or repairs the building may require for the term of the lease. Because the tenant is covering these costs, which would otherwise be the responsibility of the property owner, the rent charged in the triple net lease is generally lower than the rent charged in a standard lease agreement. The capitalization rate, which is used to calculate the lease amount, is determined by the creditworthiness of the tenant.
Triple net leased properties have become popular investment vehicles for investors seeking steady income with relatively low risk. Triple net lease investments are typically a portfolio of properties with three or more high-grade commercial properties fully leased by a single tenant with existing in-place cash flow. The commercial properties could include office buildings, shopping malls, industrial parks, or free-standing buildings operated by banks, pharmacies, or restaurant chains. The typical lease term is for 10 to 15 years, with built-in contractual rent escalation.
The benefits for investors include long-term, stable income with the possibility of capital appreciation of the underlying property. Investors can invest in high-quality real estate without concern for management operations including vacancy factors, tenant improvement costs or leasing fees. When the underlying properties are sold, investors can roll their capital into another triple-net-lease investment without paying taxes through a 1031 tax-deferred exchange.
Investors in triple net lease investment offerings must be accredited with a net worth of at least $1 million excluding the value of their primary residence or $200,000 in income ($300,000 for joint filers). Smaller investors may participate in triple net lease real estate by investing in real estate investment trusts (REITs) that focus on such properties in their portfolios.