Leases and Triple Net Leases

What is a lease?

In a normal lease for property or land, the tenant pays an agreed rental (usually monthly) plus any utilities (like water and electricity).

The landlord pays for all operating expenses to maintain the building and land. This is also known as a gross lease structure as essentially a single amount is paid by the tenant.

A triple net lease (also known as an NNN lease), is generally a long-term lease associated with the commercial or industrial real estate business. In this type of lease, the landlord and tenant agree that apart from the rental and utilities (which are referred to as the base rental amount), the tenant will also pay for the other three big property costs – taxes, insurance, and maintenance and repairs for the interior of the building.

An absolute net lease or bondable lease is similar to the triple net lease but it also includes all the financial risk of occupying the space as well as the exterior of the building.

There are also double net and single net leases.

What is the difference in the net leases?

Triple net vs double net vs single net leases

Triple net	Double net	Single net
The tenant pays: Property taxes Property insurance Maintenance and repair costs for the interior of the building	The tenant pays: Property taxes Property insurance	The tenant pays: Property taxes

Double and single net leases are not common but do exist.

Pros and Cons of Net Leases:

Triple net lease: Pros and cons for the landlord

Pros	Cons
Consistent and predictable revenue streams (10-20 years) from high quality tenants.	Lower rental compared to market rate.
Lower risk and fewer variable expenses.	Unable to increase rent even if the market improves a lot.
Focus on paying the bond (if they have one).	Could be negatively impacted if tenant is in financial distress.
No property management requirements.	Finding a new tenant willing to agree to an NNN lease can be difficult.
Essentially passive income as tenant takes on almost all responsibilities.	Property can remain vacant for years.
Can charge premium if tenant decides to buy-out the property (get out of the lease}.	Vacancies can be costly.
Low turnover of tenants.	Property in a good location is expensive – location is critical to attract quality tenants.
Don’t have to deal with tenant on daily basis (eg for maintenance issues).	Adverse consequences /devaluation of property if the tenant does not pay insurance, taxes and maintenance & repairs.
Attractive for investors.

Triple net lease: Pros and cons for the tenant

Pros	Cons
Below market rental.	Locked into a long lease.
Stable and predictable rental for a long time.	Management of the property – need maintenance teams or contract it out.
Pay utilities directly so no risk of non-payment.	Bears cost of increase in taxes and insurance.
More leverage in negotiations with the landlord.	If the building is shared amongst a few NNN tenants, and some are non-viable, this could increase your monthly expenses (as these are shared equally with all tenants).
These properties are usually in high-value commercial real estate locations with good infrastructure.	Unexpected maintenance and damage can significantly increase your monthly expenses as well as your insurance premiums.
Maintain the property as if it is their own using their own chosen contractors.	Maintenance costs are an expense rather than an investment when you don’t own the property.
Can choose their own insurer and get better premiums.	Exiting the lease earlier might come at a premium.
Can object to taxes directly with the authorities.
Don’t have to deal with the landlord on a day-to-day basis eg for maintenance.

Why do investors love triple net leases?

• Quality tenant in a quality location, eg an anchor tenant such as a large supermarket chain looking to rent in a shopping mall. Acts almost like a long term bond.

• Long-term investment (looking at stability over growth of investment).

• Predictable rental increases improve net operating income over time.

• Lower operating costs.

• Relatively risk-free.

• Consistent and stable income stream.

• Able to secure favourable financial terms from reputable institutions to secure the investment.

• A great way to ‘park your money’ for a trust fund baby, those with an inheritance, and for international investors.

Have you dealt with different lease types? Share your experiences and insights in the comments to help others understand the benefits and challenges of net leases!

To view a short-form infographic on Leases that acts as a quick reference guide, click on the image below.

The information provided is for information purposes and does not constitute legal advice. Contact a lawyer should you require assistance. Legal Dynamix is not a law firm and does not provide legal advice on the subject matter contained herein.