- Triple Net Lease
Triple Net Lease (NNN)
In a triple net lease (also known as triple-net or NNN), the tenant or lessee agrees to cover all property costs, such as real estate taxes, building insurance, and upkeep. In addition to the price of rent and utilities, there are other costs. Contrarily, in conventional commercial lease agreements, the landlord is usually in charge of making some or all of these payments.
NNNs are merely one kind of net lease for commercial property. Under a single net lease, tenants are required to pay both rent and property taxes, and in a double net lease, property insurance is frequently added.
Understanding Triple Net Leases (NNN)
A net lease in commercial real estate is a contract where the tenant is responsible for paying all or a portion of the property's taxes, fees, and maintenance costs.
If a building is leased by a property owner to a company under a triple net lease, the tenant is responsible for paying the building's property taxes, building insurance, and the price of any upkeep or repairs the facility might need over the lease term. The rent charged in the triple net lease is typically less than the rent charged in a typical lease arrangement because the tenant is covering these expenses that would otherwise be the property owner's responsibility. The anticipated rate of return on a commercial property is known as the capitalization rate (or "cap rate"). The tenant's creditworthiness is frequently taken into consideration while calculating the cap rate, which is used to set the lease price.
Calculation Triple Net Lease Amount
The following calculation can be used to determine the lease amount in a triple net lease:
Lease Amount = (Base Rent+Common Area Maintenance+Property Tax+Property Insurance)/12
Here, Base Rent=Rent Per Square Feet×Total Leased Area
These are the steps for calculating the NNN lease amount:
- By dividing the total leased space by the rent per square foot, you may first calculate the base rent. If the price per square foot is specified in monthly units, multiply it by 12 to obtain the price per square foot per year.
- Determine the annual cost of maintenance fees, property taxes, and insurance.
- Add base rent, maintenance fees, property tax, and insurance to that total.
- Lastly, divide the outcome by 12. (Since we need to determine the monthly lease amount)
Advantages Of Triple Net Leases
- The care, repair, and appearance of the rental property are entirely under the tenant's control.
- Also, the tenants have direct control over the expenses they incur, such as water and electricity.
- A triple net lease is a reliable source of income.
- As the tenant is responsible for paying all utilities, repairs, taxes, and property management fees and problems, a triple net lease involves less management hassle. The landlord now has more time to devote to their main line of work.
Disadvantages Of Triple Net Leases
- The risk of property taxes and any rise in the cost of insurance is assumed by the tenant. They also take on any expenses related to keeping the property up.
- When setting the rental amount, the landlord may have overestimated the running costs, which causes the tenant to pay too much for various expenses.
- Tenants might put some effort and time into maintaining the property, from engaging repair services to shopping for and purchasing insurance and, if necessary, contesting taxes.
- Throughout the period of occupancy, several additional expenses could be incurred.
- It could be difficult to find trustworthy tenants who are prepared to sign a triple net lease. The duration between renters should also be taken into account because it could result in a loss of rental income when the building is unoccupied.
- Landlords should be concerned about the tenant credit risk. Since the tenant is in charge of paying running expenses, their financial stability and strength are crucial.
- With a triple net lease (NNN), in addition to the rent and utilities, the tenant also agrees to pay for the building's insurance, upkeep, and real estate taxes.
- Commercial real estate frequently uses triple net leases.
- Due to the tenant's assumption of ongoing costs that would otherwise be the owner's responsibility, triple net leases frequently offer lower rents.
- There are also double net leases, which include both property taxes and insurance, and single net leases, in which the renter is responsible for paying property taxes.