Why Landlords Prefer Triple Net Leases for Commercial Properties

Mary Hall is an editor for Investopedia’s Advisor Insights and has contributed to numerous books and academic papers. She earned her bachelor's degree in English from Kent State University, complemented by a business minor and a focus on writing.

Understanding Lease Structures

Net leases require tenants to cover certain property expenses such as taxes or insurance alongside their monthly rent. Typically, these leases offer lower base rent compared to traditional leases because tenants take on more financial responsibility.

There are three main net lease types: single net (N), double net (NN), and triple net (NNN). In a triple net lease, tenants are responsible for real estate taxes, insurance premiums, and maintenance costs.

Key Points

• A net lease involves tenants paying additional costs beyond basic rent.
• Single net leases require tenants to pay property taxes, resulting in a reduced base rent.
• Double net leases add insurance payments to the tenant's responsibilities.
• Triple net leases assign taxes, insurance, and maintenance expenses to the tenant.

Single Net Lease (N)

Also known as an "N" lease, this arrangement requires tenants to pay property taxes in addition to rent. Other expenses like insurance, repairs, and utilities remain the landlord’s obligation.

Landlords often collect property taxes through rent payments to ensure timely and accurate tax remittance to the municipality.

Double Net Lease (NN)

Commonly called "NN" leases, these require tenants to cover both property taxes and insurance premiums along with rent. Maintenance costs continue to be the landlord’s responsibility.

In multi-tenant commercial properties, costs are typically apportioned based on leased space size, with landlords managing payments and billing tenants accordingly.

Triple Net Lease (NNN)

In an NNN lease, tenants take on the full spectrum of expenses, including maintenance, taxes, and insurance, in addition to rent. This often results in lower base rent for tenants.

To protect against unexpected high maintenance costs, landlords may use bondable net leases that prevent tenants from terminating the lease early or renegotiating rent.

Important Note

Bondable net leases help landlords avoid tenant defaults or lease terminations due to rising property expenses.

Lease Type Comparison

Simple Explanation

Traditional leases have tenants paying rent while landlords handle all other property costs. In contrast, net leases shift some or all of these additional expenses to tenants, reducing landlord risk and lowering rent.

Gross Lease vs. Net Lease

Gross leases charge tenants a fixed rent that covers all expenses, with landlords paying taxes, insurance, and maintenance. Net leases separate these costs, making tenants responsible for some or all additional expenses.

Net Lease Compared to Step-Up and Ground Leases

Step-up leases include predetermined rent increases to protect landlords from inflation. Ground leases allow tenants to develop property during the lease, with ownership reverting to the landlord after the term.

Benefits of Triple Net Leases for Landlords

Triple net leases encourage long-term tenant occupancy, reducing vacancy risks. They provide consistent income streams and transfer unpredictable property costs to tenants, safeguarding landlords’ investments.

Why Large Corporations Favor Triple Net Leases

National companies seeking brand consistency often choose triple net leases. For example, Walgreens frequently enters 25-year NNN leases, taking full control over maintenance, vendors, and operating expenses, making them reliable tenants and attractive investments.

Conclusion

Net leases are specialized commercial lease agreements where tenants pay additional property expenses. Among them, the triple net lease places the most financial responsibility on tenants, covering taxes, insurance, and maintenance, alongside rent and utilities, offering landlords reduced risk and stable returns.

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