What is an NNN Commercial Lease advice, Property triple net lease guide, Commercial real estate tenants let

What is an NNN Commercial Lease?

14 March 2024

An NNN commercial lease, sometimes known as a triple net lease, is a specific type of commercial real estate lease that requires tenants to pay not only base rent, but also proportional expenses associated with running and managing the building.

But what exactly does this mean for tenants and landlords? What considerations should you make before using one? And how do you get the most out of one?

The Basics of NNN Commercial Leases

An NNN lease is one in which “the Tenant pays the expense to operate the property in addition to the base rent. The Tenant becomes liable for paying the various operating expenses based on the percentage of the building that the Tenant occupies.”

The three Ns stand for “net, net, and net,” representing the three most important areas of expense that the tenant will cover: property insurance, real estate taxes, and common area maintenance. Common area maintenance usually includes a variety of different expenses not associated with property taxes or insurance. For example, tenants may be responsible for paying for services like snow removal, landscaping, and general repairs.

That said, every lease is different, and different landlords may structure their NNN leases differently.

NNN leases are most commonly used for commercial buildings with multiple tenants. In most cases, the Landlord is responsible for estimating these expenses and collecting payment for the coming year. At the end of the year, the tenant is provided with an actual, accurate accounting of these expenses, and any necessary adjustments are made; in the event of overpayment, a tenant is provided a refund, and in the event of underpayment, the tenant’s rent is adjusted.

The Pros and Cons of NNN Commercial Leases

These are some of the best advantages of NNN commercial leases:

Reliable, stable income and profitability. People often gravitate toward these types of commercial leases because they provide reliable, stable income and somewhat predictable profitability. These leases are often very long term, stretching for decades in some cases, and locking tenants in for a fixed price. The prices of certain fluctuating expenses, like property taxes and maintenance, are also baked into the agreement, so you won’t have to worry as much about increasing expenses in the future.
Tenant autonomy. Because tenants are collectively responsible for things like landscaping and maintenance, they have more freedom and autonomy to make the improvements they want and hire the services they want. For many commercial tenants, this is a huge advantage and a potential draw. It also reduces potential conflicts between tenants and landlords.

Reduced overhead. Real estate investors appreciate these types of commercial leases because of their reduced overhead as well. You won’t be the one paying for property taxes, insurance, or common area maintenance, so you’ll have less complexity and fewer overall expenses to deal with.
More passive management. These days, passive income is all the rage. Securing an NNN commercial lease doesn’t mean all your responsibilities as a landlord will go away, but you will be able to manage your property much more passively. If you’re interested in saving time, or if you already have too many properties to reasonably juggle, this is a major advantage.

There are a few drawbacks to consider as well, such as:

Longer terms and rent limitations. While many real estate investors appreciate the longer terms on these types of leases, they also do come with some disadvantages. For example, you may not be able to adjust rent in coordination with rising demand if your lease doesn’t allow you to do so.
Higher vacancy costs. Also, if and when a tenant leaves, you may face both higher vacancy costs and longer vacancies. Without a tenant to shoulder their proportional burden of expenses like common area maintenance and property taxes, this responsibility will fall on the property owner. Accordingly, it pays to practice strategies that promote tenant retention and work to fill vacancies as quickly as possible.
Potential tenant deterrence. While many tenants appreciate the freedom and stability of an NNN lease, this isn’t a good fit for all tenants. Tenants searching for more flexible lease terms and short-term tenants are likely to be turned off if this is the only lease arrangement available.

Are NNN leases the right move for your real estate investment strategy? This is a difficult question to answer, as it depends on the building you own, the tenants you want to target, and your personal goals when it comes to real estate investing. That’s why it’s often advantageous to work with commercial real estate investing experts, who can help you make better real estate decisions and reduce or streamline your responsibilities as a manager.

With more expert consultants, it’s much easier to achieve your goals.

Comments on this guide to What is an NNN Commercial Lease article are welcome.