The Triple Net Lease (NNN Lease) is a type of real estate agreement where the tenant of a property will need to pay various property-related expenses apart from the rent. It is called an NNN lease, as the tenant is paying for three operating expenses. These added expenses include maintenance charges, property tax, and insurance. The agreement basically happens between the lessee and the lessor.
In this article, you will learn about the triple net lease or the NNN lease and also how it works for real estate transactions. Apart from that, you will also learn how to calculate the triple net lease with the help of the calculating formula. Finally, we will also look at the major pros and cons of the triple-net lease agreement. Hence, to learn more about this real estate agreement, read on through to the end of the article.
What Is A Triple Net Lease (NNN Lease)?
According to Investopedia,
“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 expenses are in addition to the cost of rent and utilities.”
In general cases, that is, in standard commercial lease agreements, some of these three payments, or all three of these payments, are the responsibility of the landlord or the property owner. Since the tenant pays for real estate taxes, maintenance charges, and building insurance, the property owner lowers the rent for the tenant.
The NNN lease is a type of commercial property net lease. In a single net lease, the tenant will need to pay property taxes in addition to rent. Furthermore, in a double-net lease, the tenant also pays for property insurance.
You can see that triple net leases provide low risks and steady income for the real estate investor. Hence, this agreement has become quite popular among investors as an investment vehicle.
How Does The Triple Net Lease (NNN Lease) Work?
According to Wall Street Mojo,
“In a triple net (NNN) lease, the lessee (tenant) agrees to pay three necessary expenses pertaining to the leased real estate—maintenance cost, insurance, and taxes. In contrast, a normal lease agreement requires landlords to bear those overheads. The lease amount is calculated using the capitalization rate—it determines the rate of return expected by a real estate investor.”
A net lease is basically a lease that the tenant pays as a portion of taxes or all of the taxes, fees, and maintenance costs of the property. On the other hand, the capitalization rate is used to calculate the lease amount of the property. This amount also helps to determine whether the tenant is credit-worthy or not.
As already discussed, the rent of the tenant is often low, as tenants spend considerably on other expenses. Apart from that, the tenant also has the facility to add a maximum limit to the expenditure. In this way, the tenant is able to manage fluctuations in overhead. However, in this case, if the maintenance cost, tax limit, and property insurance cost cross the limit, the landlord is expected to pay a part of the expense.
Since landlords can get rid of maintenance costs, insurance, and taxes, the NNN can be a great leasing option. However, to ensure that these benefits are actualized, the landlord leases the property for a long time, mainly ten to fifteen years. To ensure optimum returns, the lease agreement should have a clause for yearly escalation in the lease amount.
How To Calculate Triple Net Lease (NNN Lease)? – Formula
Here is the formula of the triple net lease (NNN lease):
|NNN Lease Amount = (Rent of the property + Maintenance Costs for the common area + Property Tax + Property Insurance) / 12|
Here, the Rent of the property = Rent per square feet x Total area of lease.
According to Small Business Chron,
“Insurance companies consider several factors when deciding what rate to charge. If the tenant cannot afford the insurance, he may let the policy lapse or choose not to file a claim. If there is severe damage to the property and the tenant files bankruptcy, the landlord may have no recourse for payment.”
What Are The Pros And Cons Of Triple Net Lease (NNN Lease)?
The following are the major pros and cons of triple net lease (NNN lease):
Pros Of Triple Net Lease (NNN Lease)
Here are the major pros of the triple net lease:
- It provides the landlord with a long-term and consistent passive income since most rents are for 10-15 years.
- It reduces the burden of the landlord since there are no property overheads, no maintenance fees, no tax, and no insurance fees.
- The benefit of the tenant is that they can get the property at a lower rent (base rent) than a gross rent for the long term.
- The tenants also have direct control over the costs that they pay.
Cons Of Triple Net Lease (NNN Lease)
Here are a few cons of the triple net lease:
- The biggest con for landlords is that the tenant gets the chance to occupy the property for a long time. This restricts the landlord to use the property for other purposes.
- Since most NNN lease agreements contain fixed rent amounts, it eliminates progressive returns.
- If a tenant renovates and makes changes, if the landlord wants to re-lease the property, it needs to be rearranged.
You can see from this article that the Triple Net Lease (NNN Lease) agreement is a commercial property agreement that the tenant needs to pay in addition to the rent. The other charges include maintenance charges, property taxes, and insurance. You can use the capitalization rate to determine the lease amount, which depends upon how much a lessee is credit-worthy.
In triple net leases, the rent is mostly kept low because the tenant offers expenses that would otherwise be the responsibility of the landlord or the property owner. Do you have any more information to add regarding the NNN lease? Share your answer with us in the comments section below.