Triple Net Lease: A Complete Guide to NNN in Commercial Real Estate
Triple net lease, triple net, or NNN, is a type of commercial real estate lease where the tenant or lessee pays the full expenses of the property. This includes real estate taxes, building insurance, and maintenance, in addition to the cost of rent and utilities. With a triple net lease, tenants know exactly what they are paying for the space and operating expenses. This type of lease also tends to have lower base rents than other commercial lease types because the tenant assumes ongoing expenses.
Because commercial leases can be priced in several ways, it can be confusing to know which type of lease format is right for your business and budget. This complete guide will cover how a triple net lease works, what is included in a triple net lease, and the advantages of this type of lease.
Covered in this article:
- What is a Triple Net Lease?
- Types of Commercial Real Estate Lease Rates
- Lease Rates Explained
- How Does a Triple Net Lease Work?
- What is Included in a Triple Net Lease?
- How do you Calculate a Triple Net Lease
- Other Expenses to Expect in a Triple Net Lease
- Triple Net Lease and ESG
- Advantages of Triple Net Lease
- Understanding Triple Net Lease
Types of Commercial Real Estate Lease Rates
Lease rates in commercial real estate are determined by the landlord and paid by the tenant to occupy the space. The rate is typically calculated on a square footage basis over a period of time and is generally billed monthly. Depending on your space needs, required fixtures, and desired amenities, you will be quoted for one of the following:
- NNN – Triple Net Lease
- Gross+E – Modified Gross Lease
- Full-Service Gross Lease
Lease Rates Explained
1. NNN – Triple Net – a triple net lease rate is an agreement in which the tenant agrees to pay all expenses related to the property and their usage of the property. This means the tenant will pay a portion of the property’s expenses, such as property taxes, common area maintenance, and insurance. NNN leases are favorable to tenants because they hold no hidden fees and provide a level of cost transparency. At Silver Star Properties, we typically have triple net properties.
2. Gross+E – Modified Gross – a modified gross lease rate is an agreement in which the tenant pays a base lease rate to the landlord for their space and select shared and additional costs. Additional costs could include common area maintenance, janitorial, or electricity fees. This type of lease differs from a triple net because the landlord pays all property operating expenses. Modified gross leases typically carry a higher base rental fee. Still, they are favorable when there are few common areas with minimal maintenance subjecting the tenant to low fees on top of the base lease rate.
3. Full-Service Gross – a full-service gross lease rate is a type of lease in which all expenses are included in one lease rate cost. The one rate will include base rent, property insurance and taxes, common area maintenance fees, and space utilities. Full-service gross leases provide the tenant less transparency regarding a tenant’s space usage. Still, they are favorable because they are easier to account for as all expenses come in a single bill.
How Does a Triple Net Lease Work?
In a triple net lease agreement, the tenant absorbs most of the significant costs and expenses for the property rather than the landlord. These expenses are included in a monthly rental rate for the building or space, property taxes, insurance premiums, and property maintenance and repairs. Each tenant pays an equal portion based on the square footage of the space they are leasing.
Triple net leases contrast traditional commercial leases because expenses are spread out among more lessees, with each tenant paying a small, prorated amount of the ongoing monthly expenses while still benefiting from lower base rent.
What is Included in a Triple Net Lease?
The key to a successful and mutually beneficial triple net lease is clearly understanding what is included in the agreement you are signing. Typical contractual elements include the following:
- monthly rental rate (base rent)
- operating expenses
- taxes and insurance
- property use
- common area space use.
It’s important to note that in a NNN lease, the tenant can be required to pay the costs of structural maintenance and repairs. For example, roof repairs, in addition to the above-listed items can be considered a common costs incurred by the tenant in a NNN lease.
For the right business and tenant, this type of lease offer potential savings in case the costs for CAM, taxes, and insurance are lower over the lease term. The savings are passed directly onto the tenant if these costs come down.
Below you’ll find a Triple Net Lease Expense Matrix, which illustrates the type of expenses that are included in this type of lease:
Common terms defined:
1. Base rent is the tenant’s net monthly payment before calculated operating expenses, taxes, and insurance. Base rent is due on an agreed-upon date each month stipulated in the commercial lease agreement.
2. Janitorial expense refers to all costs associated with cleaning, sanitizing the property, trash, and garbage removal, and any other work items associated with a janitorial agreement.
3. Utilities may include any or all of the following based on the individual lease agreement: water, gas, electricity, garbage, recycling, waste removal, Internet, cable TV, or satellite service.
4. CAM stands for common area maintenance. This includes all other operating costs outside of insurance and taxes. Examples of CAM: HVAC, landscaping, parking garage or lots, signage, roofing, security, or snow removal.
5. Taxes and Insurance refers to the fees associated with annual tax and insurance payments.
How do you Calculate a Triple Net Lease
To calculate a triple net lease, you’ll follow a basic Triple Net formula:
Triple Net Lease = Base rent + CAM + Taxes and Insurance
First, add annual property taxes and insurance for the building, then divide the total by the building’s total amount of rental square footage. Next, calculate maintenance costs because these costs may rise over time.
The calculation is straightforward if the entire building is rented to a single tenant. In the case of multiple tenants, CAM (common area expenses) must also be accounted for. Calculate the annual costs for utilities, cleaning, and supplies. Then divide the total annual CAM costs by the rental square footage of each tenant’s rental space in the building.
Here is an example computation:
A landlord leases a commercial building of 15000 square feet to the business entity ABC Ltd.— for office space. It is a NNN lease, and the ascertained monthly rent of $ 0.30 per square foot was charged. The annual common area maintenance for the office costs $1300, property tax costs $ 500, and the yearly real estate insurance payable costs $1200.
To calculate the monthly lease amount:
Lease Amount = (Base Rent + Common Area Maintenance + Taxes & Insurance) / 12
Base Rent = Rent Per Square Feet × Total Leased Area
Base Rent = (0.30 × 12) × 15000 = $54000
Lease Amount = ($54000 + $1300 + $500 + $1200) / 12
Lease Amount = 57000 / 12 = $4750
ABC Ltd. will pay the landlord a monthly lease amount of $4750
*Note: tenants should always budget for expenses that are not included in the NNN lease terms, such as tenant improvements and utilities. The next section of this guide will cover these exceptions in more detail.
Other Expenses to Expect in a Triple Net Lease
While triple net leases may seem straightforward, tenants should always plan for other expenses that fall outside a typical triple net lease agreement. Additional fees may include utilities (power, water, gas, Internet, cable), security services, or tenant improvements outside a typical tenant improvement allowance. Because costs may fluctuate based on tenant uses or needs, tenants should plan for these changes and budget accordingly.
When it comes to aesthetic improvements to a space, a landlord may on occasion cover several items under a tenant improvement allowance. These improvements can include fresh paint, new carpeting, new wallpaper, the addition of office spaces or meeting rooms, HVAC, electrical or plumbing upgrades, and upgrading kitchen and bathroom spaces. Upgrades that fall outside this scope are the tenant’s financial responsibility and should be budgeted for accordingly.
Let’s take a look at an example. At signing a triple net lease, company ABC estimates a monthly budget for water and sewer charges. This estimate is based on the landlord’s previous tenant expenses. However, company ABC has heavy water usage because they are a small retail space restaurant, and the previous tenant was a tech company that used the space as working office space. If company ABC only budgeted solely based on the previous tenant, they may find themselves significantly over budget each month for water utilities. This is an example of why new tenants may desire to budget extra for unforeseen expenses in the first year until they better understand monthly expenses.
Triple Net Lease and ESG
Environmental, social, and governance (ESG) reporting is a method for companies to communicate their efforts toward sustainability, ethical behavior, and good corporate governance. This type of reporting has become increasingly important as investors look for information about a company’s impact on the environment and society.
Green leases, a subcategory of triple net leases, have emerged as a way for landlords and tenants to work together to reduce their environmental footprint. Green leases often include provisions for energy efficiency, renewable energy use, and other sustainability measures, making them an attractive option for companies looking to improve their ESG profile.
Other strategies include smart metering, which can have benefits for both tenants and landlords. Landlords receive the data they need for ESG reporting, while tenants receive real-time monitoring of their utility consumption rather than relying solely on monthly utility bills.
Advantages of Triple Net Lease
A triple net lease agreement has multiple advantages for both parties, the tenants and the landlord. Base rent is typically lower with NNN leases than other commercial lease types, a benefit to the tenant. Lower rent also makes tenant acquisition more accessible and lowers the costs of building vacancies for the landlord.
- Lower Base Rent. NNN base rent is typically lower than gross or percentage leases.
- Stability. NNN leases are common when signing long-term leases ( five to ten years). This provides the landlord and tenant with predictability and stability in income (landlord) and an established place of work (tenant).
- Location. NNN leases are common for properties located in high-value areas with higher traffic and exposure. For instance, commercial properties in the downtown metropolitan area would be up for a triple net lease.
Use Case for Triple Net Lease: Who is it for?
As with any commercial real estate agreement, landlords and tenants must consider all factors when determining whether a triple net lease is suitable for their property or business.
For example, in economic downturns, landlords can rely on triple-net properties with corporate tenants to provide reliable monthly income. Properties with low vacancy rates, meaning a greater number of tenants, typically make for successful triple net leases. These scenarios are attractive to tenants because multiple tenancies means that the assumed expenses are split among a greater number of lessees.
By the same token, new build or well-maintained properties with low ongoing maintenance costs are also more attractive for triple net lease tenants, as it means lower monthly costs for the lessee. For example, a newer building is less likely to incur the same maintenance costs for roof repair as an older building.
Understanding Triple Net Lease
When selecting a property to lease or choosing a lessee, tenants and landlords must consider several factors to make an advantageous decision. Triple net leases provide several key advantages, including lower base rent, location, and stability. When selectively used, NNN leases are beneficial to both landlord and tenant.