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 Sometimes they're called triple N leases, net net net leases and even NNN leases, but we're going use the more descriptive term of triple net lease. Admittedly, this kind of arrangement is more common when discussing commercial real estate, but if you're looking to lease a home, you might also encounter the term. That said, what exactly is a triple net lease?
Common Lease Types
Whether it's a warehouse or a home, there are three working definitions or common types of leasing arrangements that you might negotiate with your landlord:
- Gross Lease - with a gross lease, the tenant pays a flat monthly payment; the landlord is responsible for paying all the operating costs including property taxes, homeowner's insurance or property insurance, and utilities.
- Percentage Lease - this type of lease is much more common in commercial real estate markets where there is a charge for rent, operating expenses, maintenance of common areas and even a share of the gross revenues generated. Obviously this last fee is much more common in shopping malls.
- Triple Net Lease - with a triple net lease the tenant pays a base rent, taxes, insurance and also any charges for repairs and maintenance of the property.
No doubt there are countless combinations of leases that you might encounter. At the one extreme we have the gross lease - in which the landlord is responsible for maintaining and running the property. At the other end we have triple net leases which place most of the financial burden of owning and operating the real estate property on the shoulders of the tenant.
Double Net Leases
One good example of the variation you'll find in the leasing marketplace is the double net lease. In this type of leasing arrangement, the landlord / lessor takes responsibility for maintaining the roof and structure. Money set aside for this expense is termed a reserve.
Advantages of a Triple Net Lease
Depending on your role in a triple net lease - whether or not you're a landlord or of a tenant - your perspective on the advantages and disadvantages is going to be different. So to keep things on the positive side, we're only going to talk about the advantages of a triple net lease.
Property Taxes
One advantage of a triple net lease is that any increase in property tax is passed on directly to the tenant. In fact, some property owners fail to challenge increases to property tax based on the assumption that these costs can be pass on to future tenants.
This works well until the lessee moves out, then the owner is stuck paying the tax bill until another tenant can be found. The landlord must also be careful that these increases do not put their property at a competitive disadvantage to their neighbors.
Property Insurance
A second advantage of the triple net lease is that the lessee is responsible for payments of property insurance. This is an ideal situation as long as the tenant has adequate insurance on the property itself and the tenant is not experiencing any financial difficulties.
At the extreme, there are circumstances where the tenant could be driven to measures such as willful damage to the property in the hope of collecting against insurance claims. If such an insurance claim was denied and the tenant went bankrupt the landlord would be responsible for payments necessary to restore the property.
One variation on the triple net lease is called the bondable lease. In this arrangement, the tenant carries casualty insurance in addition to property insurance.
Best Lease Arrangement
There really is no right answer to the question - what is the best lease arrangement for me? That's because the answer is really - that depends. As a tenant, you could do very well with a triple net lease when compared to a gross lease.
The only way you can make a fair comparison is by figuring out what your net cost will be under varying arrangements. Just make sure you have enough information to compare leases. If you're looking at a triple net lease, then you're going to have to ask the property owner for any records of taxes, utilities and repairs so that you can estimate your actual monthly costs of renting or leasing a particular property.
About the Author - Triple Net Lease
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