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What is a triple-net lease, and should business owners use them?

On Behalf of | Oct 10, 2024 | Commercial Real Estate |

If you are a commercial real estate owner, leasing arrangements can help you to maintain profitability and operational efficiency. Business and commercial property owners frequently encounter a common type of lease: the triple-net lease (NNN). This leasing structure shifts some of the financial responsibilities from the landlord to the tenant. This provides an alternative way to manage expenses and risks associated with owning a commercial property, such as a shopping center. Tenants are responsible for more than paying regular rent in a triple-net lease.

Before adopting this type of lease for your enterprise, it’s vital to weigh the advantages and disadvantages to determine whether it aligns with your business goals and long-term strategy.

Advantages and considerations of triple-net leases

A triple-net lease is an arrangement where the tenant takes on additional responsibilities. In this type of lease, tenants cover property taxes, insurance and maintenance or repair costs, making it different from a gross lease, where the landlord shoulders these expenses.

For commercial property owners in California, a triple-net lease can relieve the burden of fluctuating property expenses, providing a stable cash flow from the rent payments alone. A triple-net lease heavily reduces the financial risk for the landlord. By transferring some of the variable costs to the tenant, you help protect your income from unexpected expenses like increased property taxes or major repairs. Also, tenants can be more motivated to maintain the property well, as they are responsible for upkeep.

However, a triple-net lease may not always be the best fit for every situation. For example, if your property features older buildings that require frequent repairs, tenants may push back on signing a lease where they bear these costs. Similarly, tenants who operate smaller businesses might find the added expenses difficult to manage, which could lead to higher vacancy rates or difficulty attracting tenants. Therefore, it’s important assess the condition of your property, the types of tenants you wish to attract and the market conditions before deciding whether a triple-net lease is suitable.

Before committing to a triple-net lease, it’s wise to consult with real estate and legal professionals who understand the local market. They can help you tailor lease terms that benefit both you and your tenants, helping to better ensure the long-term success of your endeavors.