Understanding Triple Net Leases
Your business' new location and the type of lease you'll have there are among the top concerns when projecting bottom lines and future success. Understanding what the common options are and which is most suitable for a specific business is imperative. Triple net leases are a common lease type, with a number of benefits and drawbacks. Learn more about the details to see whether this model is the best one for your new business venture.
What Is a Triple Net Lease?
A triple net lease, which is also sometimes called an "NNN lease," is one where the tenant is solely responsible for taxes, insurance and repairs and maintenance on a property. In real estate, a "gross lease" is the name for a standard lease where the landlord is responsible for these expenses. In triple net, the property is leased "net" of these obligations.
What Types of Businesses Typically Have Triple Net Leases?
Triple net leases are most commonly used for freestanding commercial buildings. They will typically have a single tenant. Initial terms on triple net leases usually run for 10 years or more. They will also often have rent increases built in throughout the term of the lease.
These leases are common with businesses like convenience stores, fast food restaurants or other franchise-style businesses. For some, this is because of the uniform appearance that these businesses are required to have by their franchisors. It would be too onerous for a landlord to fulfill the franchisees' requirements. A triple net lease offers flexibility.
However, these are not the only types of businesses where you will see triple net leases. many industrial, manufacturing and office properties also use a triple net lease model.
What Are Some Benefits of Triple Net Leases for Tenants?
Triple net leases are arrangements that allow landlords to reduce uncertainty when it comes to the costs of owning property. Because they will only be responsible for predictable costs like the mortgage, a landlord may find a triple net lease a more sustainable option. In general, these leases are less expensive for tenants because the tenant will take on costs that would normally be built into the lease.
A tenant who requires a great deal of control over the property can find a triple net lease a far more flexible arrangement.
What Are Some Potential Drawbacks of Triple Net Leases?
A tenant who has a triple net lease may save money on rent, but may run into unexpected costs in insurance, taxes or repairs. Insurance costs can vary quite a bit from year to year. If a year has high levels of claims because of severe weather events, for instance, the tenant could find themselves with a severely elevated premium in the next year.
Maintenance costs can also be hard to control and predict. While some tenants are in a position to do many repairs in-house, others may find that they are dependent on outside contractors for work, which can increase costs substantially.
Doing Due Diligence with a Triple Net Lease
While some costs cannot be predicted in advance, many can be seen during a thorough inspection of a building. A building with a 15-year-old HVAC system, for instance, is likely to need significant repairs or even replacement of that system sometime within the span of a 10 year lease. This is also true of other expensive items like roofing. Be sure that the building is in sound condition at the beginning of the lease and that should the building become unsuitable, there are clauses that make it less painful to end a lease prematurely.
Careful inspection of buildings and study of leasing agreements can help you avoid any surprises that could hurt your bottom line. By finding a suitable building and an agreement that is fair to both landlord and tenant, you can make a property leased with this agreement a suitable place for your business to grow and thrive.
Kris Lindahl is a nationally recognized innovator in real estate, marketing, leadership and community involvement. In 2014, he was Minnesota's #1 real estate agent as ranked by Real Trends. In 2017, the Kris Lindahl Team rose to become one of America's top real estate teams. And in May 2018, he fully embraced his own real estate model to form Kris Lindahl Real Estate, Minnesota's premier real estate agency.