Triple Net Lease

Updated on April 8, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Triple Net Lease Meaning

A triple net lease is a real estate agreement where the tenant pays multiple property-related expenses in addition to the rent. The added expenses include maintenance charges, property tax, and insurance. It is an agreement between the lessee and the lessor.

It is also referred to as NNN lease (net net net), emphasizing the payment of three operating expenses. Therefore, the amount of rent is kept lower than gross lease agreements. In regular lease agreements, the owners take care of property tax, insurance, and maintenance costs.

Key Takeaways

  • A triple net lease (NNN) lease is a commercial property agreement—in addition to rent, the lessee pays maintenance charges, property taxes, and insurance.
  • The NNN lease amount is determined using the capitalization rate. And this rate depends on the creditworthiness of the particular lessee.
  • The monthly lease value is calculated as follows:
  • Base Rent + Common Area Maintenance + Property Tax +
    Property Insurance / 12
Triple Net Lease

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How Does Triple Net Lease Work?

In a triple net (NNN) lease, the lesseeLesseeA Lessee, also called a Tenant, is an individual (or entity) who rents the land or property (generally immovable) from a lessor (property owner) under a legal lease agreement. read more (tenant) agrees to pay three necessary expenses pertaining to the leased real estate—maintenance cost, insurance, and taxes. In contrast, a normal lease agreement requires landlords to bear those overheads. The lease amount is calculated using the capitalization rateCapitalization RateCapitalization Rate is the rate that helps determining value of a real estate investment. It projects the expected rate of return on the investment made. read more—it determines the rate of return expected by a real estate investor. This rate depends largely on the tenant’s credibility.

In an NNN agreement, the base rent value is often low—as tenants spend considerably on other expenses. Also, the tenant has the facility to add a maximum limit to the expenditure; this way, the lessee can manage fluctuations in overhead. If the cost of maintenance, insurance, and tax cross the limit, the landlord will pay part of the expense.

NNN is a great leasing option for landlords since they get rid of property maintenance fees, insurance, and taxes. However, to actualize these benefits, the lease must be long-term—10 to 15 years. A lease agreement should also have a clause for a yearly escalation in the lease amount to ensure optimum returns.

Small investors, the ones without prescribed incomes or net worthNet WorthThe company's net worth can be calculated using two methods: the first is to subtract total liabilities from total assets, and the second is to add the company's share capital (both equity and preference) as well as reserves and surplus.read more, can also enter NNN lease agreements. In order to participate in the NNN lease, small investors are required to invest in Real Estate Investment Trusts (REITs) that include similar properties in the portfolios.

Triple Net Lease Explained in Video

Calculation

The formula for computing the lease amount in a triple net lease is given below:

Lease Amount = (Base Rent+Common Area Maintenance+Property Tax+Property Insurance)/12

Here, Base Rent=Rent Per Square Feet×Total Leased Area

The steps for determining NNN lease amount are as follows:

  1. First, find the base rent by multiplying the rent per square foot with the total leased area. If the rent per square foot value is given in monthly figures, multiply it by 12 to convert it into a yearly figure.
  2. Then, ascertain the yearly expense on maintenance charges, property tax, and insurance.
  3. Next, add up base rent, maintenance charges, property tax, and insurance.
  4. Finally, divide the result by 12 (Since we need to determine the monthly lease amount)

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Example

Andrea leases a commercial building of 10000 square feet to the business entity XYZ Ltd.— for office space. It is a NNN lease, and the ascertained monthly rent of $ 0.25 per square foot was charged. For the office, annual common area maintenance costs $1200, property tax costs $ 600, and the yearly real estate insurance payable costs $1200. Now, determine the monthly lease amount.

Solution:

Lease Amount = (Base Rent + Common Area Maintenance + Property Tax + Property Insurance) / 12

Base Rent = Rent Per Square Feet × Total Leased Area

Base Rent = (0.25 × 12) × 10000 = $30000

Lease Amount = (30000 + 1200 + 600 + 1200) / 12

Lease Amount = 33000 / 12 = $2750

Thus, XYZ Ltd. paid Andrea a monthly lease amount of $ 2750.

Triple Net Lease Pros and Cons

The NNN lease has numerous advantages to the landlord and the tenant, as discussed below:

NNN lease disadvantages are as follows:

  • Tenants occupy the property for years—restrict landlords from using the property for other purposes.  
  • Many NNN lease agreements include fixed rent amounts—this eliminates progressive returns.
  • Tenants renovate and make changes. As a result, for re-leasing purposes, the property has to be rearranged for the new lessee.

Triple Net Vs. Gross Lease

In a gross lease, tenants pay a single fixed payment to the landlord (including rent). The landlord bears all other costs—property tax, insurance, maintenance, and other ancillary expenses.

Triple Net Lease and Gross-Lease

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In a modified gross lease, the tenants cover a proportionate share of property taxes, insurance premiums, and maintenance expenses—in addition to the basic rent at the start of the lease. A modified lease is majorly used in the case of commercial properties where there is more than one tenant to share the property.

The following comparison chart will help us distinguish between a triple net lease and a gross lease:

BasisTriple Net LeaseGross Lease
MeaningA lease format where the lessee pays maintenance costs, property tax, and insurance on top of the base rent.A lease agreement where the lessee has to pay a lump sum rent amount inclusive of all the overheads.
SimplicityIt is a complex lease format.It is comparatively simple.
Landlord ResponsibilitiesHere, the landlord doesn’t have to manage the property-related overheads.Here, the landlord is responsible for clearing various expenses.
Tenant ResponsibilitiesIn an NNN lease, the tenant has to pay rent, maintenance fees, property tax, and building insurance.In such a lease, the tenant only needs to pay the rent.
Rent AmountLowHigh

Frequently Asked Questions (FAQs)

What is a triple net lease?

A NNN lease is a rental agreement between a landlord and a tenant. The latter pays off maintenance charges, real estate insurance, and property taxes—in addition to rent.

How do you calculate the triple net lease?

The NNN lease is computed as the sum of base rent amount, property maintenance charges, tax, and insurance divided by the total number of months in the year, i.e., 12. The base rent amount is the per square feet rent multiplied by the total leased area (in square feet).

What is the difference between net and triple net leases?

In a net lease, the lessee only pays property tax and rent. In a NNN lease, the lessee incurs multiple costs—property maintenance expense, tax, insurance, and rent.

This has been a guide to what is Triple Net Lease & its meaning. Here we explain triple net lease definition, property sale, calculation, pros, cons, examples & triple net lease vs. gross lease. You can learn more about accounting from the following articles –

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