A triple net lease (also known as an “nnn” lease) is a lease agreement where the tenant or lessee agrees to pay for the ongoing expenses of the property, in addition to the rent.
Ongoing expenses includes building insurance, real estate taxes, maintenance, and utilities.
Property Taxes
Property taxes are an advantage for owners in a triple net lease. Many communities will increase appraisals annually, and offsetting this to the tenant makes the costs more predictable for the property owner.
This can backfire if the tenant moves out early, and the landlord has issues filling the vacancy. Any new tenant will have to absorb the property taxes, and the landlord may need to give concessions to fill the vacancy.
Building Maintenance
The benefits of building maintenance are correlated with the age and condition of the property. If the building is old and in disrepair, then the landlord will benefit by offsetting the maintenance costs with the tenant.
With that said, this is less of a benefit for new buildings that are in good condition.
Tenant Insurance
Tenants are mandated to carry insurance on the property – they may also have to pay for deductibles on the policy, as well as any uninsured damage.
Although this sounds like a great deal, there is a lot of risk if the tenant lets the insurance lapse. If the tenant cannot cover a loss, and files bankruptcy, the landlord may end up holding the bag.
Benefits to Landlords & Investors
Triple net leases are popular for investors and landlords because they create a predictable and steady stream of income. Expenses can vary each year, and offsetting that to the tenant removes this uncertainty.
In addition to making the income more predictable, the leases are signed for long durations, with rent increases factored in. With the long leases, landlords and investors don’t need to worry as much about renewals and renegotiations.
Benefits to Tenants
Triple net leases will have a lower rental rate compared to a standard lease (sometimes called a gross lease). This is due to the landlord not covering the costs of owning the property.
Finally, the tenant can deduct these costs in their taxes. In a gross lease, the landlords and investors would deduct these expenses instead.
Is a Triple Net Lease Worth It?
There is a lot to consider as a real estate investor or landlord. Think about the age of your building and maintenance costs associated. If the building is new and maintenance costs are low, it may be worth considering a gross lease.
Another consideration is the growth rate of the area – while growth could increase property taxes, this could help you increase rent prices as well.
Finally, be very skeptical towards real estate professionals who are selling triple net leases. They often come with high commission costs and low yields. Always compare the return on a triple net lease to comparable investments.