What Is a Triple Net Lease (NNN)?

Throughout the history of modern investment, few assets have performed as consistently as commercial real estate. Today, that performance continues to impress, and these types of investments are the cornerstone of some of the largest portfolios in the world.

When choosing to invest in commercial real estate, however, one type of lease agreement stands out: the triple net lease. This lease structure allows landlords to collect stable, reliable returns while minimizing involvement in the day-to-day upkeep of a property, meaning it's the best of both worlds for busy investors and those seeking more passive income streams.

Quick facts about triple net leases

• Tenants cover property costs. This includes most things, from property taxes to operating expenses.
• They're long-term leases. NNN leases typically last longer than other types of commercial leases.
• Landlord income is more consistent. Because the tenant pays for property costs, the landlord's monthly payments fluctuate less.
• Base rent is lower. To offset the increase in operating expenses, most triple net leases offer lower monthly rent for the tenant.

What is a triple net lease?

A triple net lease is a type of commercial lease where the tenants pay property taxes, property insurance premiums, and maintenance expenses related to the property being rented. These responsibilities are in addition to the monthly rent, though that rent is typically lower to account for all of the expenses that would otherwise be paid by the property owner.

Similar to how you would calculate gross vs. net income, “triple net lease” refers to the money a landlord “nets” after deducting any fees or upkeep costs paid by the tenant throughout the month. Though by far the most popular, triple net leases are only one type of net lease. Other types, known as single or double net leases, put the responsibility of certain expenses on the tenant, but not all. For a single net lease, tenants are responsible for paying rent and property taxes. For a double net lease, tenants must pay rent, property taxes, and building insurance.

Why landlords and investors prefer triple net leases

Out of all available options, many landlords and investors prefer triple net lease investments for the impressive advantages they offer compared to other lease agreements. Specifically, a triple net lease gives investors five main benefits:

Fewer management responsibilities

A core component of triple net leases is how they allow property owners and landlords to avoid property management issues. Rather than having to constantly check in about repairs and upkeep, those responsibilities fall to the tenant to handle.

This allows landlords and investors to treat triple net leases as a more passive investment—something that's especially attractive for those with larger portfolios or less free time.

Stable returns

When it comes to real estate, maintenance can be the main source of volatility from month to month. With a triple net lease, tenants are responsible for these costs, meaning that the volatility is shifted off of investors and landlords.

Keep in mind that this arrangement of responsibilities often means that monthly rent is lower than with other commercial leases—but also more stable. Property owners know exactly what to expect for income and expenses each month.

Tax benefits

Despite the fact that tenants pay operating expenses and maintenance, landlords can still benefit from property depreciation when tax season rolls around. Specifically, property owners can deduct any annual depreciation expenses from their taxable income.

Keep in mind that investors may need to pay back any claimed depreciation when they sell the property, something that's known as "depreciation recapture."

Ease of resale

Because of their low risk and stable income for landlords, triple net lease properties are particularly attractive for real estate investors—especially those looking for a more passive investment. When the time comes to sell such a property, it's typically much easier to find a buyer.

Inflation adjustments

Many standard NNN leases include an inflation clause, which allows the property owner to adjust monthly rent to account for changes in the inflation rate. This is yet another way that triple net leases provide a more stable, consistent stream of income for investors.

How to know if a triple net lease is right for you

When debating whether a triple net lease investment is right for your current situation, there are a few basic questions you should ask yourself:

• What are my financial goals? While they rarely offer quick spikes of income, triple net leases provide steady, more-or-less passive returns that can serve as the foundation of your portfolio.
• Can I afford a large, up-front investment? To lease a property you first need to buy it, and commercial real estate typically comes with a hefty price tag. Make sure you have the resources to make such a purchase without straining your funds.
• What is my plan for potential vacancies? Finding the right tenant for a triple net lease can take time, so having the funds to endure potential vacancies in the property is a must.
• Do I have a way to vet potential tenants? Because you're transferring so many responsibilities onto them, triple net lease tenants should be even more reliable and capable than normal commercial real estate tenants. Make sure you have a way to vet potential tenants to reduce the risk of default.
• How much do I want to be involved in the property's day-to-day upkeep? Investors with busier schedules or larger portfolios may choose a triple net lease to reduce involvement, while others may want to be more hands-on with their investments. Decide which type of investor you are before choosing a lease structure.
• How much risk am I willing to take on? Although it frees up the investor's time, a triple net lease puts a significant amount of responsibility on the shoulders of a tenant. This means that a landlord needs to be able to trust that a tenant will handle any issues correctly when they arise.
• Do I want to create an LLC to invest in this property? Investing as an individual or forming a real estate LLC to do so each comes with its own benefits, and it can pay off to do your research before choosing which is best for you.
• What's my exit strategy for the property? Despite the fact that triple net leases are typically long-term agreements, it's still important to have a plan for exiting the agreement. This can mean re-leasing to the same tenant, finding a new tenant, or selling the property entirely.

Benefits of using a commercial real estate lawyer

When writing or executing a commercial lease of any kind, it's best to consult an experienced attorney who can help with the process. Here’s what an attorney can do for you:

Provide legal guidance

Even among other types of commercial leases, triple net leases can be exceptionally complicated. An experienced commercial real estate lawyer can guide you through the process while remaining compliant with all federal, state, or local laws.

Customize agreements

While it may be possible to use a contract template for more basic types of leases, a triple net lease typically needs to be tailored to the tenant's and landlord's needs. This includes specific language and clauses about repair costs, modifications to the property, ways to negotiate potential disputes, and any excluded operating expenses that the tenant won't pay.

Minimize risk

Placing more individual responsibility on the tenant can free up time for landlords but may increase risk unless proper steps are taken. When drafting a triple net lease, your commercial real estate lawyer will include sections such as indemnity clauses, clauses requiring certain types of insurance coverage, and provisions for what happens if a tenant doesn't fulfill their responsibilities.

Ensure enforceability

It is in the best interests of both tenants and landlords for a commercial lease to be written in clear, legally enforceable language. This ensures that both parties are protected in case of dispute, have a complete understanding of the arrangement and expectations, and can defend themselves in the case of legal challenges.

Frequently asked questions

How is a triple net lease different from other commercial real estate leases?

In a triple net lease, the tenant pays for taxes, building insurance, and maintenance costs. In a single net lease or a double net lease, the tenant is responsible for only one or two of such costs, respectively. Meanwhile, a gross lease makes the landlord responsible for paying operating expenses, but the tenant typically pays a much higher monthly rent.

What is an absolute net lease?

Also known as a bondable lease agreement, an absolute net lease allows a property owner to have as little involvement as possible with the property itself. With this kind of lease, the tenant is responsible for paying absolutely all expenses related to a property’s day-to–day operations and upkeep.

Why would a tenant accept a triple net lease?

While maintenance responsibilities fall on the tenant in a triple net lease, that often means that the tenant pays less for monthly rent. This also means that a tenant may have more control over their monthly costs, since they're able to navigate taxes, insurance, and property repair costs as they see fit.

What types of property use triple net leases?

Most triple net leases are used for single-tenant properties, commercial spaces, industrial properties, or office buildings.

Can you negotiate a triple net lease?

Yes. Some landlords negotiate specific terms to offset the risk of triple net leases for tenants. These terms could include monthly caps on maintenance costs, exclusions for certain types of maintenance costs (such as roof repair), or incentivized lease renewal options.