A triple net lease (NNN) is a commercial rental form that makes all property expenses the responsibility of the tenant. On top of the base rent, the tenant can be expected to pay for the building’s property taxes, insurance, and maintenance. These represent the three (3) “Nets” of the agreement. The contract type is most commonly used with single-tenant properties, but can be customized to meet the needs of most, if not all commercial units and buildings.
As an overview, the tenant is responsible for expenses under the following three (3) nets:
- N – Property taxes
- N – Insurance
- N – Maintenance & repairs
- Mortgage (if any) – while the tenant’s monthly rent should more than makeup for this (for a single tenant building), it is the landlord’s responsibility to pay for the monthly mortgage payments.
- Base rent – This is the stable, consistent payment made from the tenant to the landlord every month.
- Taxes – With the exception of the landlord’s income tax (from the tenant’s rental payments), all property-related taxes will be paid for by the tenant. Annual property taxes are paid by the tenant directly to the landlord on a monthly basis (as an estimate), and taxes that result directly from their business are paid to the tax authority.
- Utilities – This covers all variable and non-variable costs to the property. Electricity, water, sewer, gas, trash/recycling, internet, and any other costs that result from the tenant’s business.
- Maintenance / repairs – Includes both routine and unexpected repairs. The lease may specify certain high-cost repairs are the burden of the landlord if negotiated by the parties.
- Insurance – This covers fire damage, acts of nature (lightning, flooding, hurricanes, etc.), theft/burglary, and could also include risks unique to the area. For example, properties in “tornado alley” will often have tornado insurance, either built-in to the existing policy or on its own.
- Removes uncertainty – Because the landlord doesn’t need to pay variable costs such as utilities and HVAC, they can expect to make the same income from the property each month.
- Easier to manage – With all of the costs and maintenance on the tenant, the rental property is virtually duty-free.
- Typically long-term – The average NNN lease extends for ten (10) to twenty (20) years.
- Lower risk – An unexpected, costly repair to the property won’t interfere with the landlord’s earnings.
- Lower rent – The rent for the property will be significantly lower than if the lease was gross or modified gross. Even with the expenses included, tenants will often pay less per month due to the benefits provided to the landlord.
- Tax opportunities – The additional costs incurred to the tenant can be deducted from their business’ operating expenses, making swings in utilities and other costs less impactful.