An Overview of Triple Net Leases Used in Commercial Real Estate
Prospective tenants of a commercial space often inquire about the
nature of a triple net lease. These type of leases are commonly
used in commercial real estate leasing and also go by the names
of NNN lease, absolute net lease, or net-net-net lease. In these
situations, the tenant is responsible for paying nearly all the
operating expenses required to maintain the leased property.
Difference Between a Gross Lease and a Net Lease
A gross lease is typically associated with residential leases,
whereby the landlord pays the majority of the property’s expenses.
Some exclusions include personal utilities the tenant uses, and
Net leases are much different, as mentioned earlier. They’re put
into one of three categories: single net, double net, and triple
net. These categories represent the number of expenses the tenant
would be responsible for in a commercial lease.
For example, expenses of a commercial property tend to fall into
one of these buckets: property taxes, insurance, or common area
maintenance (CAM). In a single net lease, the tenant would pay
one of these expenses, in a double net lease, they would pay for
two expenses. Finally, in a triple net lease, the tenant is
responsible for all three expenses.
An Examination of Absolute Net Leases
Although, by the name, an absolute net lease sounds like a triple
net lease, it’s actually slightly different. If a tenant enters into
an absolute net lease, that means every conceivable expense must be
paid by them. Even expenses related to the wear and tear of the
building, in the form of repairs or maintenance, is the tenants
In certain cases, a tenant would still have to pay rent even when a
natural disaster, such as a fire, destroyed the building. But, when
there are expenses that come up and only benefit the landlord, such
as accounting and legal costs, those must be paid by the landlord.
A Review of Expenses in a Triple Net Lease Agreement
In summary, the tenant of a triple net lease agreement pays
for property taxes, insurance, CAM, utilities, personal
insurance premiums, janitorial services, and so forth.
The expenses that fall under CAM include the operating expenses
and utilities related to the common areas. When a tenant occupies
a retail space, and the other tenants have a triple net lease, the
CAM expenses are prorated based on the percentage of space they each
occupy. In this example, tenant A leases a store that is 800 square
feet. And the total size of the building is 16,000 square feet.
That means tenants A has to pay five percent of the total CAM costs.
What About Rent?
A large advantage for a tenant in a triple net lease is the price of
rent. Usually, the cost of rent is much lower with these leases when
compared to other lease options. Businesses who are brand new stand
to benefit from a triple net lease. While their business is growing,
they have a few years to enjoy lower rent expenses. Also, when a
building is newer, tenants who find this favorable won’t mind entering
into a triple net lease.
Benefits of a Triple Net Lease for the Landlord
A landlord can greatly benefit from a triple net lease. Without
having to pay for the expenses, they won’t have to worry about their
tenant not being conscious of their energy/utilities useage or not
keeping the place properly maintained. These leases require the tenant
to be careful of how they treat the space. If they act negligently,
they are the ones who ultimately have to foot the bill.
Moreover, these type of leases tend to be signed for the long-term, up
to 10 years or more. So, the landlord doesn’t have to spend time finding
new tenants very often.
Potential Risks for Tenants in Triple Net Leases
If the tenant leases a space in an older building that hasn’t
been renovated in some time, they will have to cover the costs of repairs
or maintenance on the building when needed.
Tenants can be a bit wary of triple net leases because the expenses
are variable, especially as they relate to repairs and maintenance.
They aren’t able to budget them accurately, and therefore can be resistant
of entering into a triple net lease agreement.