What is a triple net lease?

Triple N, triple-net or NNN all refer to a triple net lease. This type of
rental agreement absolves the landlord of the most risk by requiring the
tenant to pay the majority of property expenses. There are three types of net
property expenses:

• Property taxes: These taxes are derived from the estimated value of
  the property. They’re calculated and billed by the state government
  where the property resides.
• Insurance premiums: Property insurance helps cover the building for
  hazards such as fires and floods and is usually required by the landlord.
• Maintenance fees: Costs associated with maintenance and repairs of
  the building are often the responsibility of
  the tenant in a triple net lease agreement.

Commercial landlords often favor triple net leasing arrangements to reduce
their risks when entering a rental agreement. Most triple net leases are
long-term—usually for a period of 10 years or more.

Pros and cons of a triple net lease

The primary benefit of a triple net lease for the tenant is securing a low
base rent for a long period of time. Since the contract absolves the property
owner of the most risk, the cost of rent normally reflects that. The length of
the lease also helps the landlord ensure a low
turnover rate for their property.

Low rent isn’t the only benefit for the tenant. Certain rental expenses may be
used as a
qualified business income deduction on taxes. This opens the door for business owners to make needed improvements and
alterations to the building they’re renting. A tax professional may be able to
optimize the qualified expenses of a triple net lease, meaning potential tax
savings for the tenant.

Increasing maintenance costs, taxes and insurance fees pose the greatest risk
to the tenant and need to be considered carefully. If the property is older,
there’s always a chance that the costs to maintain it may eventually
break your budget. Increasing property values may be a sign that
business is booming but may also generate a higher yearly tax bill and higher
insurance premiums.

When unexpected costs arise, tenants may attempt to get out of their lease or
expect rent concessions. As a result, landlords often use bondable leases that
cannot be terminated before the end of the lease
date. In a triple net lease, you assume much of the risk and reward of the
property owner.

Pros:

• Low base rent
• Long-term lease
• Potential of qualified business tax deductions

Cons:

• Increasing maintenance costs
• High tax bills
• Fluctuating insurance premiums

Other types of leasing options

The triple net lease isn’t the only commercial leasing option. There are a
variety to choose from, including:

• Gross rent lease: All incidental expenses are covered by the landlord
  for one set rental fee.
• Modified gross lease: You and the landlord agree to share incidental
  expenses in addition to the rental fee.
• Net lease: In addition to the rent, you’re responsible for a single
  net expense, such as the property taxes.
• Double net lease: You’re responsible for two expenses additional to
  the rent, most commonly property taxes and insurance premiums.
• Percentage rent lease: You agree to pay a base rental rate plus a
  percentage of your gross sales to rent a space in a multi-tenant location.

All types of commercial leases are a factor of two things: risk and how much
you’re willing to pay to mitigate it. A gross rent lease could be an excellent
option for a business with a steady income stream, while a triple net lease
might be a better option for a startup that needs lower rent. Researching and
understanding which type of lease works best for your business will help
ensure that you find the right fit for your budget.

Related: How to Find a Commercial Lease Space

Special considerations for triple net leasing

Any lease agreement needs to be reviewed thoroughly before signing. Since
triple net contracts are normally signed for 10 years or more, considerations
for the future need to be made even more carefully. Researching property
history and real estate costs help give you a better understanding of what to
expect over time. Talking to other businesses in the area can also be helpful
to get an idea of what your utility and maintenance costs might be.

Triple net leases are a great option if you’re looking to secure a low rent
for an extended period of time. Contact a local business realtor to help find
a triple net property and provide expert advice for your business.