Net-Net-Net Lease

Definition of a Net-Net-Net (NNN) Lease

A Net-Net-Net Lease, commonly referred to as a Triple Net Lease or NNN, is a commercial real estate lease agreement where the tenant or lessee agrees to pay all of the property’s operating expenses in addition to their monthly rent and utilities. In this arrangement, the "triple" refers to the three primary categories of costs that are shifted from the landlord to the tenant: real estate taxes, building insurance, and maintenance (often called Common Area Maintenance or CAM).

Detailed Description

In a traditional "gross lease," the tenant pays a flat fee, and the landlord covers the property's carrying costs. However, in a Net-Net-Net Lease, the tenant assumes the financial responsibility for nearly every cost associated with operating the facility. This structure is highly prevalent in freestanding commercial buildings, retail power centers, and industrial properties.

The three specific "Nets" include:

• Property Taxes: The tenant pays the local government property taxes directly or reimburses the landlord for them.
• Property Insurance: The tenant pays the premiums for the building's casualty and liability insurance policies.
• Maintenance: The tenant is responsible for all repairs and upkeep, including the roof, structure, parking lots, and landscaping.

Importance in Commercial Mortgages

The NNN lease structure is a critical factor for lenders evaluating a commercial mortgage application. Because the tenant bears the burden of fluctuating operating costs, the landlord’s Net Operating Income (NOI) remains highly predictable and stable. This stability provides several advantages during the financing process:

• Lower Risk Profile: Lenders view NNN properties as lower-risk investments because the landlord is protected from sudden increases in taxes, insurance premiums, or repair costs.
• Debt Service Coverage Ratio (DSCR): Since the income is consistent, it is easier for a lender to calculate a reliable Debt Service Coverage Ratio, which measures the property's ability to cover its mortgage payments.
• Credit Tenant Leases (CTL): Many NNN properties are occupied by "credit tenants"—large, national corporations with strong credit ratings. Lenders often offer favorable interest rates and higher loan-to-value (LTV) ratios when a mortgage is backed by a long-term NNN lease with a credit-worthy tenant.
• Investment Appeal: These leases are favored by "passive" investors and 1031 exchange buyers, making the properties highly liquid and attractive to secondary market mortgage buyers.

While the Net-Net-Net Lease offers security for the lender and landlord, the base rent is typically lower than that of a gross lease, reflecting the additional financial responsibilities the tenant has assumed. From a mortgage perspective, the length of the lease term is also vital; lenders generally prefer the lease term to meet or exceed the amortization period of the commercial loan.