What is NNN Lease + How to Calculate it Easy
Are you wanting to open up a “brick and mortar” store and need to rent a commercial real estate property? When reviewing the cost to rent an office space, you might notice NNN on the lease. You might be wondering, “What is NNN?”
If you’re unfamiliar with the term triple net lease, you’re in the perfect place. Whether you’re an interested tenant or into real estate investing, this post is for you!
What is NNN?
NNN is a type of commercial real estate ease called a triple net (NNN) lease. All commercial leases have a base rent amount that charges a tenant per square foot a year.
However, a triple net leased building will make the tenant responsible for paying the operating expenses. The tripe net amount is usually less than the base amount.
For example, a landlord advertises a rent of $30 NNN per sq. ft. The NNN indicates that it’s a triple net lease. Therefore, the base rent amount per year for a 1,000 square foot space is $30,000 a year or $2,500 a month.
Base Amount = Rent per square foot x Square footage = $30/sqft x 1,000 sqft = $30,000 a year or $2,500 a month
However, a NNN amount per year of $10 would yield $10,000 a year ($10/sqft xsqft000 sqft) or about $833 a month.
Thus, the total monthly rent for the tenant is about $3,333 ($2,500 + $833).
As another example, a landlord advertises an available 2,500 sq. ft. space in one of their office buildings. The rent is $20 NNN per sq. ft. The triple net lease amount is $8 per sq. ft.
The base rent amount calculates to be $50,000 a year ($20 x 2,500) or about $4,166 a month. The triple net amount calculates to be $20,000 a year ($8 x 2,500) or about $1,666 a month.
Therefore, the monthly rent for that 2,5000 sq. ft. space is about $5,832 a month!
What do NNN Expenses Include?
NNN stands for Net Net Net. The NNN expenses are designated to pay for property taxes, property insurance, and common area maintenance (CAM).
The CAM usually includes the outside area’s upkeep, such as snow removal and parking lot maintenance. A landlord can include utilities as part of the expense. Therefore, it’s always important to review the fine print of the lease.
Thus, a landlord uses these net expenses to determine how much the NNN amount should be.
For example, a commercial property investor has to pay $8,000 in real estate tax, $2,000 in property insurance, 2,000 in maintenance a year, $12,000 in total net expenses a year. Thus, the triple net amount for a 2,000 SF. space is $6/sqft a year ($12,000 / 2,000 sqft).
However, if there are multiple commercial building spaces, then the triple net amount would be lower because the landlord splits the net expenses across the tenants and the square footage they rent.
For example, the overall net expenses for a 3,000 sqft property is $12,000. Thus, the overall net lease amount is $4/sqft year. In the case that there three tenants, each renting 1000 sqft, each tenant will have an NNN expense of $1.30/sqft year.
Is There a Single Net Lease or a Double Net Lease?
A single net lease is when the tenant agrees to pay the base rent amount and the property taxes.
On the other hand, a double net lease is when a tenant pays for two of the NNN. For example, a tenant will cover the property taxes and property insurance but not the common area maintenance.
What are the Benefits of NNN?
Commercial properties with triple net leases tend to be relatively low risk. Although the landlord is ultimately responsible for paying the real estate taxes, building insurance, and maintaining the common area, the NNN amount pays for those expenses.
When it comes to a residential real estate investment, some investors account for all the operating expenses, including taxes, insurance, and mortgage. A good investment has a gross rental income that covers all its costs and produces some cash flow, which is commonly $100 a property.
For this reason, commercial real estate investing looks more attractive than residential real estate investing!
Commercial landlords refer to these kinds of tenants as “turnkey” tenants because they pay for all the expenses.
Turnkey implies that there is no additional work done. Regarding residential investing and there is no rehab work, investors call a property turnkey property because the residential tenant can move in on day one.
As for the tenant, the additional cost is negligible because of the prime location of the property. The location will provide opportunities to feed the tenant business and cover this expense.
Absolute Net Lease vs. Modified Gross Lease
Landlords and real estate brokers often interchange the term triple net lease with an absolute net lease. However, there is a difference in the details between a true absolute net lease and a modified gross lease.
A true absolute net lease is when a commercial property is relatively new. Therefore, the tenants receive the responsibility of paying for the building’s maintenance.
However, over time, the landlord will take on most of the expenses. This kind of lease is called a modified gross lease.
Some real estate investors sell their commercial property before the absolute net lease ends. This strategy allows them to avoid taking on a modified gross lease upon renewal.
What are the Risks With a NNN Lease?
Usually, a tenant for a commercial property will be a well-known company, such as CVS or Starbucks, and will pay their lease amount in advance. However, there is sometimes a “mom and pop shop” that wants to rent out space in the office building.
Regardless of the investment property (commercial or residential), landlords should always do their due diligence when it comes to accepting a tenant. We still want to give people and small businesses a chance, but we have to weigh the pros and cons.
For example, I had an applicant interested in one of my properties. However, after doing a background check on them, I discovered they had a low credit score and two evictions as part of their rental history!
However, after I did further due diligence, I discovered that one of the evictions was an error in the report. As for the other eviction, the applicant was a guarantor for their grandmother, who did not honor the lease agreement.
I accepted their application. However, I had new tenants add more skin in the game by paying four months’ rent in advance!
Conclusion
A triple net lease (NNN) is when the tenants cover additional expenses on top of their base rent, such as property taxes, insurance, and common area maintenance. Landlords often refer to these kinds of tenants as “turnkey” tenants because they take on most costs.
These costs don’t pay for those that help operate the building, such as a property management company.
If you’re a tenant wanting to sign a real estate lease on a commercial property, be sure to read the fine print and understand what expenses you are covering.
If you’re a landlord, you need to accept that the property may not always be an absolute triple net lease property. You still need to have an exit strategy, whether that’s cashing out or doing a 1031 exchange and replace it with another commercial property!
