Triple net property investment, also known as NNN leases, has become an increasingly popular real estate investment strategy, especially among landlords and investors. The key appeal of NNN deals is that the tenant takes on many of the costs and responsibilities that landlords would normally bear. This article will provide an overview of what exactly triple net means, the pros and cons, how NNN leases work, and tips for tenants and landlords when negotiating a triple net lease. Any real estate investor looking to expand into NNN properties should have a solid grasp of the triple net model before jumping in.
Triple net transfers property costs from landlord to tenant
The ‘triple net’ in NNN refers to the three major fees that tenants pay under this lease structure – property taxes, insurance, and maintenance. By pushing these costs onto the tenant, the landlord receives steady rental income with fewer variable expenses on their end. This differs from a standard gross lease where the landlord pays for taxes, insurance, maintenance, utilities and other costs associated with owning the building. The appeal for tenants is that NNN rent per square foot is typically lower than a comparable gross lease space.
NNN leases offer benefits but also risks for both parties
For landlords, the biggest benefit of NNN leases is stable, predictable income since variable costs are passed to the tenant. Tenants with strong credit can also benefit from lower base rent. However, tenants take on more risk if expenses end up higher than expected. And landlords give up control over managing the property. Assessing the financial strength of the tenant is crucial – if they go out of business, the landlord loses a stable income stream.
Understand how costs are calculated under NNN leases
Tenants need to fully understand how maintenance, taxes and insurance are calculated under the lease terms. Some NNN leases charge expenses based on the square footage occupied, while others divide by total leasable space. If other tenants move out, the remaining tenant’s share of costs could rise significantly under the occupied space model.
Negotiate triple net lease terms carefully as a tenant
Tenants should negotiate caps on expense increases and clarify any ambiguous maintenance terms before signing an NNN lease. Landlords favor national chains and tenants with strong credit who can pay rent even if their business struggles. Showing solid financials can give tenants leverage to negotiate a lower base rent per square foot on an NNN property.
NNN leases transfer property costs from landlord to tenant in exchange for lower base rent. Tenants take on more risk but have potential cost savings. Negotiating terms like expense caps and maintenance definitions is key.