Commercial properties, like residential properties, have a lease that details how much the tenant or lessee will pay in rent, how long the tenant has to rent the property, the rights and privileges of the tenant, payments for taxes, insurance, and maintenance (also known as the “nets”), and rent increases. When the lease agreement requires the tenant to pay taxes, insurance, and maintenance in addition to the rent, it’s known as a triple net lease. A triple net lease might also be called a net-net-net lease or an NNN lease.
Types of Leases
Generally, there are a few different types of leases:
- The gross lease, the landlord pays the cost of operating the property and sets the rent at a price that’s above the operating expense.
- The modified gross lease, the landlord passes some of the operating costs, like utilities, to the tenant.
- The single net lease, the tenant pays the property taxes and the rent. The landlord pays the other operating costs.
- The double net lease, the tenant pays the taxes, insurance, and the rent. The landlord pays the other operating costs.
- The triple net lease, the tenant pays the taxes, insurance, maintenance costs, and the rent.
- The bondable lease, the tenant pays all the costs associated with the upkeep of the building in addition to the rent.
Benefits of a Triple Net Lease
At first glance, it seems like only the landlord stands to gain from a triple net lease since his monthly out-of-pocket expenses are reduced. But, tenants can benefit too since the rent in a triple net lease is often lower than for other types of leases. Since the landlord doesn’t have to shoulder the taxes, insurance, and maintenance costs, he’s able to charge less for the use of the building.
Renters also tend to have more control over negotiating a triple net lease, allowing them to ultimately have more control over the property.
Disadvantages of a Triple Net Lease
Tenants who hold triple net leases may have tax consequences if their business suffers losses because of the lease. Passive income loss limitations prevent real estate businesses from claiming rent losses as a business loss unless the taxpayer uses the triple net leased property for at least 750 and 50% of the taxpayer’s time is spent on the real estate business.
A triple net lease can be risky for the landlord. Tenants may not be able to afford the complete costs of a triple net lease. Some tenants may not alert the landlord when there is a repair that is beyond the tenant’s financial reach, leaving the building severely damaged.
Negotiable Clauses in Triple Net Leases
Commercial leases are far more negotiable than residential leases, and triple net leases are no exception. While you can negotiate virtually every statement in the lease, here are some clauses that are commonly up for discussion:
- The triple net lease might include a clause that states any expense over a certain amount will be paid by the tenant.
- The landlord uses the percentage of sales clause to collect a certain percentage of your sales when the tenant’s sales exceed a certain amount.
- Rent increases can be written out in the lease agreement. The agreement can include the amount and timing of each increase.
- Common area maintenance is typically charged in multitenant buildings like malls. It covers costs for things like landscaping and maintenance for the parking lot, restrooms, and hallways.
Some triple net leases have a reserve fund to which a portion of the tenant’s rent payments go. The reserve fund is used on an emergency funds basis to pay for expenses the tenant cannot afford.