NNN & Net Lease 101
Triple Net Leases, also referred to as NNN lease, is one of the most common lease structures in Commercial Real Estate. They have become an attractive way for investors to own real estate assets with much lower time demands and reduced liability of landlord expenses. With an NNN lease, tenants are responsible for property taxes, building maintenance, insurance and common area maintenance (CAM) in addition to base rent.
A NNN lease contains a provision for the tenant to pay, in addition to the tenant’s base rent, certain costs associated with operating the property. Each “N” or “Net” stands for Property Taxes, Insurance and Operating Expenses. Operating Expenses are often also referred to as CAM – Common Area Maintenance, and are the expenses it takes to run the property, such as repairs and maintenance, trash removal, snow removal, landscaping, parking lot maintenance, property management, exterior lighting and more.
Depending on the property, utilities and janitorial may also be included in the Operating Expenses or CAM. With a NNN lease, you typically pay the landlord one check per month, but that check is broken down into two main categories:
The Base Rent Amount
The NNN Amount (or Triple Net Amount)
For example, if you leased a 3,500 SF space with a $15 per SF base rent and $6 per SF NNN, the breakdown of payments would be:
Base Rent: 3,500 SF x $15 per SF = $52,500 per year or $4,375 per month
NNN: 3,500 SF x $6 per SF = $21,000 per year or $1,750 per month
Total rent is $6,125 per month; with the NNN being $1,750 per month.
NNN leases are the most common type of lease you will find in Retail Properties, Newer Medical Buildings and the majority of Office Buildings. The next most common lease is a Full Service Lease, followed by Gross Leases and Modified Gross Leases. (Defined further below).
Tenants benefit from the flexibility of NNN leases to repair items as needed without the need to contact the landlord providing a greater sense of control. Tenants also benefit from lower than market rent as tenants are responsible for property taxes, building maintenance, and insurance.
Landlords benefit from the minimal management required. With tenants covering common expenses, the landlord’s main responsibility becomes bookkeeping, tax returns and deciding when to refinance. This type of investment is especially attractive for landlords with full-time jobs.
Stability of cash flow is another attractive quality of NNN leases – as new NNN leases average 10 years so landlords can depend on positive cash flow for quite some time. This reduces costs associated with finding new tenants and leads to less vacancies as the building is not vacant during a new tenant search.
Price points of NNN lease properties are often more affordable than other types of properties. Investors enjoy multiple financing options as the tenant’s credit worthiness impacts valuation as much as the property itself. NNN leases are attractive for both landlords and tenants, for more information or to discuss available opportunities, please contact us today.
Additional three most common lease structures:
Full Service Lease - A full service lease for real estate typically makes the landlord responsible for paying all of the property’s operating expenses including maintenance, taxes and insurance. In this type of lease the landlord typically provides utilities including water, electricity, heat and air, janitorial services, and maintenance services.
Gross Lease - Gross Lease refers to a lease in which a fixed rental amount is paid by the tenant, monthly or yearly. In this type of lease all the expenses incurred on the property like the taxes, maintenance and other costs would be paid by the landlord.
Modified Gross Lease - On the scale of allocating responsibility for the property, a modified gross lease falls somewhere in between a NNN lease and a gross lease. In practice, many multi-tenant leases are within this category. The landlord may agree to pay for real property taxes and major repairs (roof, foundation), but the tenant is responsible for insurance and minor repairs (windows, paint). The key is to understand these terms are negotiable.