In today's world, if you let someone borrow your car, one would hope they bring it back in the same condition that it left in.

In a perfect world, they would wash and wax it, buy new air fresheners, fill the tank, top off the wiper fluid and pay a little on top for wear and tear, taxes and insurance.

In Commercial Real Estate, this dream scenario is simply called a Triple Net Lease or NNN.

Let’s start with the name itself, “Triple Net Lease” or “NNN” refers to the three major expenses a tenant would assume. 

Important to Know: If you are a landlord, maximizing the percentage of these bills that a tenant pays is your goal. As a tenant, understanding these numbers only helps your ability to negotiate future contracts.

Net Taxes 

No matter if you carry debt on the property or not, the government is always going to want its fair share in taxes. Property taxes come around every year and for many investors, can be one of the biggest yearly expenses.

A NNN Lease allows the Landlord to pass on anywhere from 1% to 100% of the tax burden to a tenant. This percentage is typically calculated based on the square footage of the property being leased. 

As all things, the percentage can be negotiated and the total payout can have minimum floors or maximum ceilings set as long as it is agreed upon by both parties.

Net Insurance

As the world gets more unpredictable, the only thing you can count on as an investor are your insurance premiums continuing to go up.

Just like Net Taxes above, a Landlord can pass on a percentage of the insurance burden to a tenant. This number is more commonly negotiated based on business type. For example, we have a five unit build that consists of a restaurant and four residential apartments. Because premiums are higher for restaurants, we chose to have the tenant pay 60% (based on Sq Ft leased) of the whole bill and 100% of any additional premium included due to fire and safety.

The majority of the time, Net Insurance will also be determined by square footage of the total property leased.

Net Maintenance

This one is the most important to pay attention to both as a Landlord and as a Tenant.

The reason this becomes so important is because this category is largely up for negotiation. Almost any bill that isn’t in the tenants can fall under “Net Maintenance”. The chart below touches on just a few of the most common billable items - 

As a landlord, you need to get good at not only negotiating these billable items into your leases but you have to ensure you have a system in place to track these bills and pass them along to your Tenant in a timely manner. It is NOT your Tenants problem you forgot to bill them for Q2 taxes last year, that's on you. I can say that because I have done it.

As a Tenant, you should understand these cost going into a conversation and negotiate your ass off. Once it is in writing, there is no going back so getting the best deal up front is always your best chance. I respect a hard negotiator, I do not respect someone who gets upset months down the line for lack of education.

The Triple Net Lease is the single reason we lean Commercial Real Estate heavy in our portfolio and I do not see that changing any time soon. It may not be the answer to all Real Estate issues or problems but with a strong NNN Lease, a landlord can alleviate many of the common headaches on Real Estate Investing.