The meaning of NNN is usually lost on most people since they will never have to sign or draft a commercial lease throughout their lives. Understanding how leases are different from rent and what to include can ultimately affect the outcome of your next transaction.
Basically, a triple net lease (NNN) is a commercial lease where the lessee pays rent, utilities, and property expenses. The property expenses usually include maintenance, insurance, and taxes, but these can vary depending on the lease.
This article describes how NNN leases work, their expenses, how to calculate them, and other types of commercial lease agreements available in real estate transactions.
What Does NNN Mean?
NNN is another term for a triple net lease. A triple net lease is a type of lease agreement used in some commercial real estate transactions, especially high-volume sales businesses that need space. Some examples are offices, grocery stores, and manufacturing facilities. Under this type of commercial lease, the tenant pays for property taxes, maintenance, and insurance by a percentage of the space they occupy.
This web page also describes NNN leases.
How Triple Net Leases (NNN) Work
Triple net leases are popular with real estate investors looking for a low-risk way to build equity while also earning a consistent, reliable income from the property. By passing on operating expenses and taxes to the tenant, you can mitigate the impact of market fluctuations and tax increases during the lease’s term.
Triple net leases vs. rent income provide significant benefits to property owners, including:
- Attracts dependable, long-term tenants
- Hands-off approach for investors
- Investment stability
- Equity
- Flexibility
When an investor leases out a triple net property, they will typically finance the entire cost of the commercial building or a portion of it and then use rental payments to pay off the funded amount. They usually hold a triple net property and use it as an equity builder for at least five years before selling it at the right time.
Acquiring or Converting Property with Tenants
If you are acquiring another owner’s tenants, there should already be a NNN agreement in place that details all of the deal’s specifics, complete with clauses outlining the tenant’s and property owner’s specific financial responsibilities. By purchasing a commercial property that already has a triple net lease in place, you inherit the lease’s terms in their entirety.
Before deciding to purchase the property, you should carefully review the existing lease to determine whether you will be responsible for any insurance premiums or significant structural repair costs.
Acquiring or Converting Property without Tenants
If you are purchasing or converting a building for NNN leases, then you will want to work with a lawyer for lease agreements. They can help you draft an agreement tailored specifically for your unique business needs.
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Expenses Included in Triple Net Leases (NNN)
Triple net leases (NNN) agreements are standard in single-tenant retail buildings and single-user industrial buildings, medical offices, banks, pharmacies, grocers, and restaurateurs. Tenants agree to pay base rent plus taxes, maintenance, insurance, or TMI. Essentially, the tenant is responsible for all variable costs associated with the building’s occupancy.
Expenses included in triple net leases may consist of:
- Insurance premiums
- Janitorial & trash removal
- Landscaping
- Property taxes
- Security
- Signage
- Utilities and maintenance
Depending on the lease terms, landlords may be responsible for expenses such as roof or parking lot repairs and upgrades to electrical, plumbing, and HVAC systems. Additionally, landlords may be liable for any structural issues that arise with the property not covered by standard maintenance expenses. The lease should specify who is responsible for these expenses when they arise. Due to the high cost of resolving these issues, commercial real estate investors should thoroughly vet any potential triple net lease assets located in older properties.
What’s Not Included in an NNN lease?
While it may appear as though every expense is included in a NNN lease, certain expenses are the landlord’s, such as the ones listed above, or a tenant’s responsibility, such as improvements. Tenant improvements, or TI, refers to work performed on an individual tenant’s space.
A landlord cannot charge tenants for:
- Business expenses
- Business revenues
- Landlord debts
- Landlord late payment fees
- Landlord negligence
- Assignments of lease
It is critical to understand that each lease is unique, and commercial leases can be extremely lengthy and complicated. It is wise to have a knowledgeable legal professional review of the lease to ensure that it includes everything you believe it contains when trying to figure out how to write a lease agreement with solid lease terms.
Triple Net Lease Calculation Example
Now that you have an understanding of NNN leases, or at least have an idea of what could be included, it is good to demonstrate an example. The rent on a commercial building is often calculated using per-square-foot numbers. It is worth analyzing the numbers since they can reveal whether the property is suitable for tenants.
Below, we’ve created a triple net lease calculation example to bring how they work into focus:
- Janet Getty is an independent commercial landlord who owns a 10,000 square-foot retail building
- She is asking $12 per square foot under a NNN building lease agreement
- By multiplying $12 by 10,000 square feet, we come up with a total annual rent of $120,000, or $10,000 per month
- Similar units in the area rent for nearly $15 per square foot
- However, Ms. Getty wants to use a NNN lease, which passes TMI costs on to tenants, which may cost the tenant between
- The prepared estimate indicates that tenants will spend around $2,000 a month in TMI or $24,000 per year
- This number brings the expected rent total to $144,000 per year or $12,000 per month
- Now, we can take the new calculation to determine the effective square foot rate at $14.40
- This retail space, even after NNN obligations, are more cost-effective than other buildings in the area
As you can see from the above-referenced example, the initial rent rate seemed like a great deal, and it still is. However, when you dig into the numbers, you’ll notice how much closer your rent gets to standard square foot rates in your area. That’s what makes a NNN lease so powerful for retailers.
They often require large spaces that can handle high volumes at predictable costs with some tenant control over the amount of rent money.
Other Types of Commercial Leases
Commercial leases come in a variety of forms, meaning that NNN leases are not the only option. As is the case with any legal commercial contract, the parties can tailor the document to their specific transaction and requirements. Start by deciding who will be responsible for certain property-related obligations.
Other types of commercial leases to consider include:
- Gross Leases: A gross lease requires the tenant to pay only rent. This option is where both the landlord and tenant agree on a fixed monthly rent, with the landlord covering the cost of any necessary repairs, insurance, and taxes, and is ideal for a commercial office lease.
- Single Net (N) Leases: The tenant is responsible for both monthly rent and property taxes on the property for a single net lease. Maintenance and insurance are the landlord’s responsibility.
- Double Net (NN) Leases: In a double net lease, the tenant is responsible for monthly rent, property taxes, and insurance, but the property landlord remains solely responsible for maintenance.
A lawyer for lease agreements can help you draft NNN leases or other types of commercial leases that protect your investment and legal rights. They can also address issues such as how to negotiate a commercial lease. Get in touch with a knowledgeable and experienced legal professional from your state today for more information.
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