Triple Net Lease

A triple net lease is a real estate agreement where the tenant pays multiple property-related expenses in addition to the rent. The added expenses include maintenance charges, property tax, and insurance. It is an agreement between the lessee and the lessor.

It is also referred to as NNN lease (net net net), emphasizing the payment of three operating expenses. Therefore, the amount of rent is kept lower than gross lease agreements. In regular lease agreements, the owners take care of property tax, insurance, and maintenance costs.

• A triple net lease (NNN) lease is a commercial property agreement—in addition to rent, the lessee pays maintenance charges, property taxes, and insurance.
• The NNN lease amount is determined using the capitalization rate. And this rate depends on the creditworthiness of the particular lessee.
• The monthly lease value is calculated as follows:
• Base Rent + Common Area Maintenance + Property Tax +
  Property Insurance / 12

In a triple net (NNN) lease, the lessee (tenant) agrees to pay three necessary expenses pertaining to the leased real estate—maintenance cost, insurance, and taxes. In contrast, a normal lease agreement requires landlords to bear those overheads. The lease amount is calculated using the capitalization rate—it determines the rate of return expected by a real estate investor. This rate depends largely on the tenant's credibility.

In an NNN agreement, the base rent value is often low—as tenants spend considerably on other expenses. Also, the tenant has the facility to add a maximum limit to the expenditure; this way, the lessee can manage fluctuations in overhead. If the cost of maintenance, insurance, and tax cross the limit, the landlord will pay part of the expense.

NNN is a great leasing option for landlords since they get rid of property maintenance fees, insurance, and taxes. However, to actualize these benefits, the lease must be long-term—10 to 15 years. A lease agreement should also have a clause for a yearly escalation in the lease amount to ensure optimum returns.

Small investors, the ones without prescribed incomes or net worth, can also enter NNN lease agreements. In order to participate in the NNN lease, small investors are required to invest in Real Estate Investment Trusts (REITs) that include similar properties in the portfolios.

The formula for computing the lease amount in a triple net lease is given below:

Lease Amount = (Base Rent+Common Area Maintenance+Property Tax+Property Insurance)/12

Here, Base Rent=Rent Per Square Feet×Total Leased Area

The steps for determining NNN lease amount are as follows:

1. First, find the base rent by multiplying the rent per square foot with the total leased area. If the rent per square foot value is given in monthly figures, multiply it by 12 to convert it into a yearly figure.
2. Then, ascertain the yearly expense on maintenance charges, property tax, and insurance.
3. Next, add up base rent, maintenance charges, property tax, and insurance.
4. Finally, divide the result by 12 (Since we need to determine the monthly lease amount)

Andrea leases a commercial building of 10000 square feet to the business entity XYZ Ltd.— for office space. It is a NNN lease, and the ascertained monthly rent of $ 0.25 per square foot was charged. For the office, annual common area maintenance costs $1200, property tax costs $ 600, and the yearly real estate insurance payable costs $1200. Now, determine the monthly lease amount.

Solution:

Lease Amount = (Base Rent + Common Area Maintenance + Property Tax + Property Insurance) / 12

Base Rent = Rent Per Square Feet × Total Leased Area

Base Rent = (0.25 × 12) × 10000 = $30000

Lease Amount = (30000 + 1200 + 600 + 1200) / 12

Lease Amount = 33000 / 12 = $2750

Thus, XYZ Ltd. paid Andrea a monthly lease amount of $ 2750.

The NNN lease has numerous advantages to the landlord and the tenant, as discussed below:

• Most NNN leases are long-term—10 to 15 years. As a result, landlords receive a consistent passive income.  
• A NNN lease reduces the landlord's burden—no property overheads, no maintenance fees, no insurance, and no tax burden whatsoever.
• Tenants benefit from an NNN lease as they can avail property at a lower base rate than a gross lease.

NNN lease disadvantages are as follows:

• Tenants occupy the property for years—restrict landlords from using the property for other purposes.  
• Many NNN lease agreements include fixed rent amounts—this eliminates progressive returns.
• Tenants renovate and make changes. As a result, for re-leasing purposes, the property has to be rearranged for the new lessee.

In a gross lease, tenants pay a single fixed payment to the landlord (including rent). The landlord bears all other costs—property tax, insurance, maintenance, and other ancillary expenses.

In a modified gross lease, the tenants cover a proportionate share of property taxes, insurance premiums, and maintenance expenses—in addition to the basic rent at the start of the lease. A modified lease is majorly used in the case of commercial properties where there is more than one tenant to share the property.

The following comparison chart will help us distinguish between a triple net lease and a gross lease:

This has been a guide to what is Triple Net Lease & its meaning. Here we explain triple net lease definition, property sale, calculation, pros, cons, examples & triple net lease vs. gross lease. You can learn more about accounting from the following articles –

• List of 4 Capital Lease Criteria
• Finance vs. Lease Differences
• Financial Lease vs. Operating Lease
• Capital Lease vs. Operating Lease