Advantages and Disadvantages of the Triple Net Lease
Posted on December 16, 2019
A triple net lease, sometimes referred to as an NNN, leaves the tenant responsible for covering the majority of the property’s expenses, on top of the monthly base rent. This includes property taxes, insurance and building maintenance. While the specifics of a triple net lease will vary between properties and agreements, the tenant is typically responsible for paying all expenses required to ensure the full functionality of the building. Triple net leases are common in commercial real estate.
But what are the pros and cons that building owners and tenants accept when signing these common commercial real estate agreements?
Building Owner Advantages
Since the tenant assumes many of the financial responsibilities of a property, such as ensuring the building is maintained and taxes and insurance are paid, minimal management is required by the building owner.
A triple net lease is typically structured as a flat rent, meaning the building owner has a fixed income to count on without worrying about losses due to tax increases or maintenance emergencies that are commonplace with other leases.
Many triple net leases have terms of 10 years or more; some even require a 25-year commitment, so building owners don’t need to worry about vacancies as often as with short-term agreements.
Triple net leases can reduce the responsibility on building owners, since the tenant is commonly responsible for maintaining and improving the space—unless a term is included in the agreement that places a cap on the tenant’s responsibility for major maintenance or repairs.
A triple net lease is transferable between building owners. This means an owner doesn’t need to wait for a lease to expire and can reap the biggest gains by selling a property when the market presents the best opportunity.
As the tenant takes on variable costs that other agreements, including a full-service or single net lease, include in their costs, the monthly base rent is commonly lower than those agreements.
A triple net lease is transferable between building owners. This, for the tenant, often means ownership of the property can change with minimal change to the day-to-day operations of the building.
As the tenant is responsible for the required maintenance and taxes associated with a property, there is complete transparency of these costs.
Building Owner Disadvantages
A tenant may put off or “live with” major building issues to avoid paying for repairs, then leaving them in the owner’s court when the lease is up. These can be costly and even interrupt the re-leasing process. To avoid major repairs and maintenance issues, building owners should consider adding a clause in the agreement that allows for regular inspections.
As a triple net lease is typically a long-term lease, the building owner may have to make improvements in order to lease the property to a different tenant. The cost of this process can add up and, in extreme cases, the financial gains achieved during a tenancy can be wiped clean during the process of improvement, or remodeling.
Due to the increased risk to a tenant, it may be hard to fill certain properties.
Tenants may incur unforeseen maintenance or repair expenses. The age and condition of the property at the time of signing can help tenants anticipate the expected maintenance or repair expenses. However, some leases allow a cap on the amount a tenant is responsible to pay for repairs.
The majority of triple net leases are found in Class A property agreements. So, a tenant who doesn’t have funds for a Class A property may not be able to find a triple net lease with other types of commercial real estate.
Tenants are often given an initial estimate of the base rent based on square footage, but the real cost of the lease can be drastically higher than the estimated rent.
Triple net leases are common in commercial real estate and come with unique advantages and disadvantages to both building owners and prospective tenants. But, caps on repair expenses, regular owner inspections and other similar provisions can mitigate some of the inherent risks.
Please know that while we’ve discussed some common advantages and disadvantages to the triple net lease, others may exist—including insurance considerations. It’s best to consult with a qualified insurance agent to ensure any property is adequately protected for your individual situation.
Chris Falk has extensive experience in commercial real estate. Contact him at (801) 416-1024 with questions about any of the common types of commercial real estate leases, or with any other commercial real estate questions or needs.