Benefits and Drawbacks of a Triple Net Lease (NNN) in Commercial Real Estate
A triple net lease is a common lease structure in which the tenant (or lessee) is responsible for paying taxes, property insurance, and operating expenses in addition to the base rent and utilities.
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A triple net lease, often referred to as a NNN lease, is a common lease structure in which the tenant (or lessee) is responsible for paying a share of the expenses of a property in addition to the base rent and utilities. The added expenses or “nets” include taxes, property insurance, and operating expenses, which are all of the costs associated with operating the property including repairs, maintenance, trash removal, landscaping, parking lot maintenance, property management, and so forth.
Benefits of a Triple Net Lease (NNN)
For tenants, triple net leases generally provide more freedom to make alterations and customize space without having to make the substantial capital investment of purchasing a property outright. Tenants may also be able to leverage the added financial responsibility to negotiate lower rents. The addition of property taxes to the borrower’s expenses may even lead to some tax benefits for the tenant. NNN leases also tend to come with protections against tax and insurance increases with the inclusion of caps placed on certain values.
As far as landlords are concerned, triple net leases are a low-risk and reliable source of income that have few overhead costs. The typical tenant in a triple net lease structure is a long-term occupant looking to invest more into its space. Many of the burdens of a landlord are also removed, as most triple net lease scenarios don't even require landlord input in regards to the daily management of the property — the NNN structure places almost all responsibilities directly on the tenant.
Drawbacks of a Triple Net Lease
Triple net leases, though popular in commercial real estate, aren't without a few drawbacks. The main concern for a tenant is the higher monthly costs as opposed to those in double or single net lease structures. Furthermore, since tenants become responsible for taxes, this puts them on the hook for any tax-related liabilities such as fines and penalties.
As for landlords, triple net leases certainly reduce overhead costs — but there is a risk of reduced long-term earnings. Earning caps, which are commonly found in many triple net lease agreements, prevent a landlord from increasing rent prices beyond a set point. This can result in a loss on future earnings if property values rise.
Even though most triple-net tenants are heavily vetted, the risk of a default still exists — and vacancies can cause additional cash flow issues for investors who would face costs that tenants normally pay. Additionally, in some cases landlords may still be responsible for the roof and structure of the property, which can be quite costly should repairs be necessary.
Related Questions
What are the advantages of a triple net lease in commercial real estate?
For tenants, triple net leases generally provide more freedom to make alterations and customize space without having to make the substantial capital investment of purchasing a property outright. Tenants may also be able to leverage the added financial responsibility to negotiate lower rents. The addition of property taxes to the borrower’s expenses may even lead to some tax benefits for the tenant. NNN leases also tend to come with protections against tax and insurance increases with the inclusion of caps placed on certain values.
As far as landlords are concerned, triple net leases are a low-risk and reliable source of income that have few overhead costs. The typical tenant in a triple net lease structure is a long-term occupant looking to invest more into its space. Many of the burdens of a landlord are also removed, as most triple net lease scenarios don't even require landlord input in regards to the daily management of the property — the NNN structure places almost all responsibilities directly on the tenant.
What are the disadvantages of a triple net lease in commercial real estate?
The main disadvantage of a triple net lease in commercial real estate is the higher monthly costs as opposed to those in double or single net lease structures. Furthermore, since tenants become responsible for taxes, this puts them on the hook for any tax-related liabilities such as fines and penalties.
For landlords, triple net leases certainly reduce overhead costs — but there is a risk of reduced long-term earnings. Earning caps, which are commonly found in many triple net lease agreements, prevent a landlord from increasing rent prices beyond a set point. This can result in a loss on future earnings if property values rise.
Even though most triple-net tenants are heavily vetted, the risk of a default still exists — and vacancies can cause additional cash flow issues for investors who would face costs that tenants normally pay. Additionally, in some cases landlords may still be responsible for the roof and structure of the property, which can be quite costly should repairs be necessary.
What are the tax implications of a triple net lease in commercial real estate?
The addition of property taxes to the borrower’s expenses may even lead to some tax benefits for the tenant. NNN leases also tend to come with protections against tax and insurance increases with the inclusion of caps placed on certain values.
What are the common terms of a triple net lease in commercial real estate?
A triple net lease stipulates that the tenant is responsible for paying for insurance, property tax and common area maintenance (CAM) expenses along with the rent. Lease terms may be between 10 and 15 years with a predetermined escalating rent. When paying a triple net lease, The tenant usually pays with one check (or one transaction) that is broken into two portions. The payment is typically divided into the base rent portion and the NNN portion.
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What are the best practices for negotiating a triple net lease in commercial real estate?
When negotiating a triple net lease in commercial real estate, it is important to consider the benefits and drawbacks of the lease structure. It is beneficial for landlords to have tenants responsible for insurance, property tax and common area maintenance (CAM) expenses, as this reduces the financial burden and transfers the financial risks from the landlord to the tenant. However, tenants should be aware that they will be responsible for any tax-related liabilities such as fines and penalties. Additionally, landlords should be aware that they may be subject to earning caps, which can result in a loss on future earnings if property values rise.
When negotiating a triple net lease, it is important to consider the length of the lease term, the predetermined escalating rent, and the tenant’s creditworthiness. Additionally, landlords should consider whether they will be responsible for the roof and structure of the property, and tenants should consider the potential for increased monthly costs.
Overall, it is important to consider the benefits and drawbacks of a triple net lease and to negotiate the terms of the lease accordingly.