Triple net lease

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A Triple net lease (also referred to as NNN or Net-Net-Net is a lease agreement on a property where the tenant or lessee agrees to pay all Real Estate Taxes (Net), Building Insurance (Net) and Common Area Maintenance (Net) on the property in addition to any normal fees that are expected under the agreement (rent, etc.). In such a lease, the tenant or lessee is responsible for all costs associated with repairs or replacement of the structural building elements of the property.

Although rents are usually lower in Triple net leases than other forms of lease agreements, this form of lease agreement is desirable for real estate investors since the expenses incurred on the investor are dramatically decreased due to the transfer of financial responsibilities on the property from the investor/lessor to the lessee. But they may also have certain tax disadvantages for the lessor. Among other effects, if the lease produces losses, these could be disallowed for their tax benefit due to the passive loss limitations of the Internal Revenue Code Section 469 or the at-risk rules of IRC §465, and significant income from them could cause a closely held C corporation to become a Personal Holding Company per IRC §542 (subject to a special tax), or an S corporation to lose this status per IRC §1362(d)(3).

This form is frequently used for freestanding buildings, such as outparcel developments or single-tenant "big box" sites.

Use of a triple net lease may be a prerequisite for credit tenant lease financing, and may permit a lender to lend to the landlord on nonrecourse terms.

In a "Double Net Lease" (Net-Net)the Lessee or Tenant is responsible for Real Estate Taxes (Net)and Building Insurance (Net), the Lessor or Landlord is responsible for Common Area Maintenance (Net). "Roof and structure" is sometimes calculated as a reserve, the most common amount is equal to $ .15 per square foot. Double net leases are rarely used in the industry.

A "Bondable Lease" (a so-called "hell-or-high-water lease") is the most extreme variation of a triple net lease, where the tenant carries every imaginable real estate risk related to the the property. Notably, these additional risks include the obligations to rebuild after a casualty, regardless of the adequacy of insurance proceeds, and to pay rent after partial or full condemnation. These leases are not terminable by the tenant, nor are rent abatements permissible. The concept is to make the rent absolutely net under all circumstances, equivalent to the obligations of a bond: hence the "hell-or-high water" moniker. An example of this type of lease would be a retailer leasing back the building it formely owned and still running the store.

Bondable leases are typically used in so-called "credit tenant lease" deals, where the main driver of value is not so much the real estate, but the uninterrupted cash flow from the usually investment-grade rated "credit" tenant.