Re-Leased Blog

Property Management

Triple Net Leases: What Landlords Need To Know

Re-Leased 06 October 2021

A triple net lease for commercial real estate involves a different set of considerations than residential leases. Commercial real estate owners use a net lease, where the tenant pays a share of the property’s overhead expenses plus their rent and utilities. Each expense is called a “net.” Investors and landlords favor the triple net lease because it benefits them from earning passive income and not worrying about the expenses.

However, as a landlord, you need to consider whether or not a triple net lease is suitable for your property and the type of tenant you want to attract to your building. The triple net lease is the most-used type of commercial lease for free-standing buildings with a single tenant. This type of lease is common for industrial properties and single-tenant retail spaces. 

A triple net lease is just one of several different lease agreement options for a commercial building with multiple tenants. In this guide, we’ll cover what a landlord needs to know about triple net leases— the benefits, risks, and whether this lease type is the best answer for your commercial property. 

NOTE: This article explains triple net leases in the U.S.

What is a triple net lease?   
Triple net lease benefits for landlords  
Triple net lease risks for landlords  
Factors to consider when investing in triple net properties 
The final word on triple net leases

 

What is a triple net lease?  

A triple net lease (also referred to as triple-net or NNN) obligates the tenant to pay a prorated share of the property expenses for the building insurance, real estate taxes, and common area maintenance (CAM) in addition to rent and utilities. The rent for a property with a triple net lease agreement tends to be lower than a single or double-net lease because the tenant assumes responsibility for more of the property expenses.   

Read more: Main types of commercial leases - get a full overview of different leases 

What’s included in a triple net lease? 

The most common expenses included in a NNN lease are property taxes, common area maintenance costs, and building insurance. When a need arises for major repairs, those expenses are often rolled into the maintenance costs.  

What’s not included in a triple net lease? 

What’s not included would be the items usually covered by the landlord, such as system repairs, roof repairs, parking lot repairs, and other big-ticket items that are not typically maintenance.  

What expenses does the landlord pay for in a triple net lease?  

Landlords favor triple net commercial leases because this lease structure allows them to pass along expenses for property taxes, building insurance, and CAM to the building’s tenants. The landlord will typically pay for utilities and debt service. Some triple net leases specify that the landlord will pay for costs associated with the roof, parking lot, and any structural issues. 

Triple net lease benefits for landlords  

We conducted a survey of commercial real estate professionals (including investors, owners/landlords, brokers, advisors, property managers, and lawyers) to understand why triple net leases are a popular choice for landlords.  

According to Zev Freidus, broker and president, ZFC Real Estate:

“Investors like triple net leases because their profit margin is fixed and guaranteed against almost any scenario aside from vacancy. They are also popular because they are completely hands-off; often, the owner does not even need a property manager since the extent of the owner’s involvement is limited to simply collecting the rent.” 

Adam Robbins, a strategic real estate advisor at Real Estate Bees, observes that:

“NNN leases are popular because they have lower risk depending on the tenant. They can be viewed more like a bond that will guarantee a fixed return. Also, the landlord has no responsibility to operate the property.” 

Bethany Babcock, founder and principal at Foresite Commercial Real Estate, echoes that sentiment on the security of triple net leases, saying:

“They are a good balance of long-term income, like bonds, and the risk of inflation also is mitigated by transferring increased holding costs to tenants during the term.” 

In our survey, we asked respondents to rank the key benefits of triple net leases. Passive income was deemed the most important benefit with the ability for leases to be transferred ranked the least important.   

Benefits-NNN-Leases-1

Passive income 

The NNN lease is as close to a passive income source as an investor can reach if they are involved in rental operations. Unless they face a large repair project for which they are responsible per the lease, investors can sit back and collect rent each month.  

Low-touch management 

Investors have low management involvement in this lease structure because the tenant pays most of the expenses and handles the daily operation. The investor needs only to collect monthly rent and pay the utilities to fulfill their management duties.  

Reliable tenants

Most triple net leases are given to tenants with a reliable track record. These tenants use the property’s location as part of their brand marketing and rarely compromise their brand. For example, the branding for a national coffee shop chain is the same at every location. They choose premium locations to rent and commit to long-term leases. If a tenant like this signs a NNN lease, the investor can enjoy a high level of assurance they will be reliable tenants.  

Longer lease terms 

Most triple net lease agreements are structured to offer long lease terms for tenant occupancy. A leasing term of 10 or more years is beneficial for landlords because it removes the risk and losses of a vacant property between tenants.

Favorable financing

Lenders often extend favorable financing terms for investors who sign on strong tenants with a triple net lease. If reliable tenants signed on with triple net commercial leases, investors could finance properties with as little as a 5% down payment. In contrast, commercial property involving a different lease structure may require 20% or more equity. 

Leases are transferable

A triple net lease is transferable to the new owner upon the sale of the property, whether an investor owns all or part of the property. The transferability makes the property more attractive to new investors.   

 

Triple net lease risks for landlords

Triple net leases are not entirely risk-free for landlords. There are a few risks they need to be aware of before using this lease structure for a tenant so we asked our survey respondents to rank these. 
 
Risks-NNN-Leases

Vacancy at the end of a lease 

Triple net leased properties may have single or multiple tenants. If there is just one tenant in the property; occupancy and income drop from 100% to 0% when that tenant leaves. As the tenant approaches the end of the lease term, there is a higher risk if a landlord is unsure whether the tenant plans to renew or vacate. 

Limited ability to reconfigure the space 

For a property leased to a single occupant with a triple net lease agreement, the property is often configured specifically for their needs. It is not always possible, without significant construction costs, to reconfigure the space for a different type of tenant. For example, a property once leased to a retail clothing store will require additional utility service if the next tenant is a grocery store.  

Reduced control of the building 

Landlords who use triple net leases give up some control of the building. They have no involvement in the building’s daily operations. Tenants are responsible for the upkeep, and unless they inform the landlord, the landlord is unaware of any maintenance and repair issues. 

Factors to consider when investing in triple net properties 

There are several key factors that landlords need to take into account before investing in triple net properties. According to Jenna Zebrowski, principal attorney at the Law Office of Jenna Zebrowski, PLLC, when it comes to deciding if a triple net lease is best for a property, investors should consider the following questions:  

“How long is the lease and how many tenants are in the property? Is it actively managed by the landlord (or its agents) or is it a passive investment? Also, what is the intention of the investors - do they intend for the landlord's agent to be involved in the property management?” 

According to our survey, the location of a property was deemed the top factor to consider followed by lease length and tenant quality. 
 
Investing-NNN-Leases

Property location 

A triple net lease suits properties close to other businesses, easily accessible by local traffic routes. Tenants look for such locations because they gain foot traffic and exposure from customers visiting other businesses. 

When it comes to evaluating a property’s location, Mike Knudsen, founder & managing principal, NNN Properties Group, evaluates the quality of a location in terms of the following value drivers: 

- Population density (1, 3, 5-mi radii) 
- Median household income (1, 3, 5-mi radii)
- Population growth (last 5 years and projected over the next 5) 
- Traffic counts
- Size of the parcel (ideally over 1 acre)
- Ideally on a hard signalized corner in a heavily trafficked retail cluster 
- Job and tax-friendly political climate 

Length of the lease 

The typical term for a triple net lease is 10 to 15 years, with built-in contractual rent escalation; some triple net leases can extend for 20 years or longer. A lease agreement with a prolonged duration is advantageous for landlords because it reduces the risk and losses of a vacant property between tenants.  

Tenant quality 

 Since triple net leases typically involve terms from 10-15 years, the landlord needs a rigorous vetting process for any potential tenant. A triple net lease can be used with any tenant. However, some triple net leases involve popular, strong companies, usually on the stock exchange. If the tenant is a publicly traded company, it’s easy for investors to analyze their financials, business ratings, and stock reports.   

Vetting a privately held company can be a bit trickier. An investor will need to look at financial statements, credit history, and market trends for the tenant’s business as part of the vetting process to understand a tenant’s potential risk. 

Property condition 

Investors and tenants need to document the property’s condition before the tenant takes occupancy. A property in good condition at the time of lease signing favors the tenant. If the building needs work, the landlord gains an advantage since they pass along the cost of future repairs to the tenant under a triple net commercial lease.  

For a building in so-so condition, tenants have little incentive to repair the building except to maintain or improve their continued use of the property. If their business does not rely on their location for branding or customer access but merely needs functional space, they may ignore falling ceiling tiles or walls that could use a coat of paint. They don’t have the landlord’s motivation, who would need to keep the property in good condition to attract a quality tenant.  

Debt on the property 

The property debt is the sole responsibility of the investor/landlord, factored into the lease rate. 

The final word on triple net leases 

“Triple net leases are great for investors who want a long-term, low-risk, hands-off real estate investment experience, and they are also great for tenants that seek more flexibility with their use of the property,” says Peter Evering, the Business Development Manager for Utopia Management.    

When you consider both the benefits and the risks, as well as the opportunities on offer by using a triple net lease with the right property, it’s clear that this can be very profitable for investors.  

To understand more about commercial leases and lease administration, check out our Ultimate Guide to Lease Administration. 

SUBSCRIBE TO BLOG

Stay on top of the latest property management tips and tricks as well as industry hot topics.