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.

Triple net lease FAQs

Who pays for roof repairs in a triple net lease?

This can vary from contract to contract. It’s common for the property owner to shoulder structural repairs, but it’s important to make sure this is specifically clarified in the rental agreement.

Can you negotiate a triple net lease?

Any lease is negotiable if the property owner is willing to work with you. If you don’t feel a triple net lease is a good option, ask the landlord if they’re open to modifications and how they will impact the cost of rent.

What does $/SF/year mean?

Commercial leases are usually listed by the amount you would pay per square foot on an annual basis. For example, if you’re quoted $20/SF/year for a 1,000-square-foot space, it would be calculated at $20 x 1,000, or $20,000 per year. To determine the monthly rate, you would divide that number by 12 months. That $20,000 per year would equal $1,667 per month.

Is commercial property insurance mandatory?

Laws regarding property insurance vary from state to state, but the landlord will likely require it as part of your lease. A business realtor should be able to provide you with details concerning business property insurance in your area.