Triple Net (NNN) Lease 101: What You Should Know

In this article, you'll learn:

What a triple net (NNN) lease is and how it impacts tenants' responsibilities.
What costs are typically covered and excluded in a true NNN lease.
Why landlords prefer triple net leases due to reduced financial risks.
The challenges and potential risks for tenants entering into a triple net lease.

Commercial leasing lingo is rife with terms that can be confusing but understanding them is essential. A triple net or NNN lease is one such term. A type of lease structure, the triple net lease is commonly employed; however, many people have misconceptions about them. Read on to learn the facts about triple net leases, so that you can properly prepare for the leasing process.

The Triple Net Lease Defined

A triple net lease is when the tenant covers the costs of all operating expenses associated with a property. That concept is straightforward, but often landlords will refer to leases as triple net when in actuality they are not. As an example, a lease may not hold tenants responsible for the cost of capital expenditures like replacing an HVAC in an old building. Because the title of triple net lease is often misapplied, it is vital that you thoroughly read any lease agreement and not simply trust that the term means your company will pay for all operating expenses.

Items Covered and Not Covered in a Triple Net Lease

In a true absolute triple net lease, tenants will typically be required to pay for:

Rent
Maintenance
Property taxes
Insurance premiums and deductibles

In buildings that have more than one tenant, the costs of maintenance, property taxes and insurance are split among all of the tenants. The amount that each tenant is responsible for coincides with the percentage of the total space in the building that they occupy.

Even with a true absolute triple net lease, there are some things that tenants are typically not expected to pay for, including:

The landlord's legal costs
The landlord's accounting costs
Fines or fees assessed to the landlord or building that are not the fault of any particular tenants

Why Landlords Love Triple Net Leases

Many landlords prefer triple net leases because they greatly reduce their exposure to risk. The leases provide a constant flow of income. When problems arise with maintenance or property values lead to tax increases, the landlord does not have to worry about the increase in costs. It is a common misconception that landlords face zero risk in a triple net lease structure. If a tenant defaults, the landlord could suddenly be faced with huge increases in costs. Plus, long-term vacancies become very costly for landlords in buildings where triple net leases are in effect.

Challenges Posed by Triple Net Leases to Tenants

As a commercial tenant, it is important to understand that triple net leases are generally not favorable for those looking to acquire office space. Landlords effectively transfer much of the risk associated with the variable costs of the property to the tenants. If you enter into one, you may find that operating expenses suddenly skyrocket. Typically, triple net leases also involve long terms, so they may be less than ideal for many companies. Moreover, landlords will often try to push tenants toward bondable net leases that cannot be terminated prior to their expiration dates.