What Does NNN Lease Mean in Commercial Real Estate?
If investing in Commercial Real Estate is something you’re researching, chances are you’ve come across the abbreviation “NNN” and may have wondered what it means. This stands for Net Net Net but is more commonly referred to as Triple Net.
What is the difference between a Traditional Lease and a NNN Lease?
A typical lease, like a Full-Service Gross Lease, puts a majority of the responsibility for property-related expenses on the Landlord, making the tenant only responsible for paying the agreed-upon rent. In a NNN lease those expenses fall to the tenant. These expenses include not only rent and utilities, but also, common area maintenance (CAM) fees, property taxes, and building insurance. Often the landlord would only be responsible for the structural integrity of the building, but nothing else.
Who benefits from NNN Leases?
For the most part, it is the Landlord/investor that benefits from a NNN structure lease.
With fewer financial responsibilities, a NNN Lease offers less overall risk for investors. By placing the financial responsibility on the tenant, the landlord is not subject to the potential pitfalls of the rising cost associated with property maintenance, taxes, insurance, management, etc. Traditionally, the structure is such that the tenant pays the NNN charges as part of their monthly lease payment. The NNN portion of the payment is based on the cost of those items associated with the expense of owning the property over the previous year, divided into 12 equal monthly installments. For new properties where some of the expenses have no historical data, an estimated amount would be assigned for those unknown expenses. Each year the actual expenses of the previous year would be reconciled against what the tenant paid in NNN charges. If the tenant paid more than the expenses were, a credit would be issued to the tenant by the landlord in the form of a reduced monthly amount charged the tenant over the next year. If the expenses were in excess of the amount collected from the tenant, the landlord would issue a revised invoice showing an increase in the monthly NNN portion of the lease payments, to make up the shortfall.
What's in it for the Tenant?
As far as the tenant is concerned, base rents for NNN Leases tend to be lower per square foot than they would be for other commercial lease structures. Since the tenant has more financial responsibility, the landlord doesn’t need that buffer in the lease rate to ensure their returns. The tenant’s assurance that they are paying only what the actual expenses are, and not a gross rent that may be inclusive of expenses that are more than what actual costs are, can be attractive as well.