In short – it’s a way for a landlord to get reimbursed for expenses. But there’s much more to it. It could also be written as ‘NNN’.
Let’s start by talking about renting your house: If you rent a single family house you usually turn over all of the expenses to the tenant. The landlord has them sign up for water, sewer, electric, and gas. In the multifamily world it’s a little bit harder. If the units are separately metered then it’s simple but many places share a sewer or water or gas lines. Sometimes a boiler heats the entire building.
It makes sense to have the tenant pay for their use of these services. But because it’s so hard to bill back, many landlords give these utilities to tenants for free and set the rent a little bit higher to compensate. Some will bill it back to the tenants in a ratio utility billing system (RUBS). Some will charge a flat feet but either of those require some sort of bill to be sent to the tenant and then a collection has happen. This is open for problems with bills forgotten to be sent or forgotten to be paid. Or worse, the tenant gets billed back more than the utility – this is illegal in many places.
The commercial realm is a little bit different. The building and entire grounds are important to commercial tenants in that they typically invite customers in, so they want things like landscaping and snow removal to be done in a particular way. A large chunk of bills goes to property tax and insurance. It would be very nice to roll all of these expenses together and charges each tenant based on the percentage of area that they’re using in the property. This is the basis for the triple net billing.
To talk about triple-net, we need to set a few ground rules. First, the rent is always billed, then we bill back certain other things on top of that. If there are multiple tenants, they pay a percentage of the total building area. Net means it is the specific amount that the tenant owes to the landlord. It is opposed to a gross lease, where there is a set fee paid for utilities. Why triple-net? Well, it’s the third type of net. Let’s start with the first.
Single-Net Lease
Pretty simple. This type of lease requires the tenant to pay their share of the property tax.
Double-Net Lease
This takes the single-net lease and adds on insurance.
Triple-Net Lease
This is the lease that adds in all the utilities and maintenance to the double-net lease. You may be wondering if there are any expenses missed. There is a little gray area here, but many of these won’t require large capital expenditures. The lease will have the details on this.
Absolute-Net Lease
This might also be called an absolute-triple-net lease. This is just a triple-net lease where the tenant directly pays all of the expenses.It is very hands-off for the landlord.
Absolute-Net Ground Lease
For completeness, I’ve included this one. This adds everything outside the building on the parcel of land as well. These are often done by large corporations who require every location to look similar. Walgreens comes to mind here.
Usually these leases are long term and can span 25 or more years. These are usually good for steady low risk income. Properties carrying a triple-net lease are going to demand a premium. Look for cap rates to be 3-4% if you are buying. If you are already a landlord, have a closer look at this type of lease. It takes longer to find a tenant, but once you do, it’s great.
