What Is a Triple-Net Lease?

A triple-net lease, often called a “NNN lease,” is commonly used in commercial real estate.  Despite their popularity, many commercial real estate professional misunderstand triple-net leases

In this guide, learn about triple-net leases, what they do and don’t include, and some of the common risks involved. Armed with this knowledge, you can better understand how to make triple-net leases work for you or find better options.

One such option is Prologis Clear Lease®, which includes base rent plus a fixed charge inclusive of all operating expenses, management fees, capital repair and replacement expenses. The only exception is real estate taxes and, in Europe, utilities.

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Understanding the Triple-Net (NNN) Lease

A triple-net lease is structured so that the tenant is responsible for paying all operating expenses associated with a property. The landlord, on the other hand, is not responsible for any expenses related to operating the business on the property.

This is one reason why the NNN lease is often considered a turnkey option.

What is a Triple-Net Commercial Lease?

Commercial real estate leases operate along a spectrum where absolute net leases are at one end and absolute gross leases are at the other. An absolute net lease requires the tenant to pay all expenses. In an absolute gross lease, the tenant pays a set amount in rent, while the landlord pays all other real estate expenses. The typical commercial lease is often called a “hybrid lease” because it falls somewhere between the two ends of the spectrum.

Triple-net leases usually fall under the absolute net lease umbrella, but it is important to recognize that a NNN lease is not necessarily an absolute net lease.
Whether a NNN lease is an absolute net lease often depends on the age of the building.

For instance, if a building is brand new, the tenant of a NNN lease is usually responsible for paying for expenses related to renovations and repairs, such as replacing the HVAC if it wears out over time.

But if the building is older, the landlord might be responsible for repairs, even though the lease is a triple-net commercial lease.

The only way for a tenant to ensure operations under a true NNN lease is to read the agreement in its entirety. It is not uncommon for landlords to use terms like “triple net,” “full service” or “modified gross” in the lease language, but those words might not reflect the terms of the lease accurately.

What Landlords Need to Know About Triple-Net Leases

Even though a triple-net lease suggests all expenses will be covered by the tenant, there are some things for which the tenant isn’t responsible. Mostly, these consist of any legal fees and costs accrued by the landlord when drafting and reviewing documents.

Additional costs would come as a result of fees from legal or accounting services. Although these expenses can be considered part of the cost of operating a business, the tenant is not usually responsible, unless otherwise noted in the lease.

While triple-net leases do offer several advantages, such as more predictable revenue streams and a relatively hassle-free business operation, there are still certain risks for property owners to understand.

One of the most important considerations when developing a triple-net lease investment property is the tenant’s credit risk, especially when dealing with private or smaller-size companies. Analyzing the financial statements of a tenant is an essential step before a landlord agrees to a NNN lease.

Another risk for the owner to consider is re-leasing of the property. It is not uncommon for triple-net investment properties to be sold near the end of a long-term lease. This shifts the risk of re-leasing to the new owner. If a property owner is inexperienced in this area, it could cause the property to remain vacant for a period of time.

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