1031 Property

A triple net lease is also known as a net-net-net or an NNN because it is a lease agreement that lets the tenant shoulder all the costs that are related to paying real estate taxes.  Other fees that the tenant usually needs to pay include the common area maintenance fee, the building insurance, and other kinds of fees such as rent.  The tenant is also responsible for shouldering expenses for any repairs that need to done to the property.

You should note that the triple net lease is usually much cheaper than any other form of lease or rental agreement because as you can see, it is the tenant who shoulders all the risks and expenses that are associated with the real estate property.  In addition, this form of lease may be desirable for the investors (in this case the lessors) because their expenses will be reduced because all the financial responsibility that comes with owning the property becomes the responsibility of the tenant.  But there are also some certain disadvantages that the lessor needs to be aware of.

Some of these disadvantages include the possibility of losing tax benefits in case the property depreciates because the income has already been classified as a passive loss. And under the Internal Revenue Code found in Section 469, passive losses are risk-free so there could be no tax benefit that the lessors can expect.  You should also note that the NNN may be required for the tenant to be able to take advantage of the credit lease financing which allows the lender to loan the landlord under nonrecourse agreements.

Aside from the triple net lease though, there is also a variation of this concept such as the double net lease or net-net. Under this kind of lease, the tenant is also responsible for the real estate taxes for the property including the building maintenance.  But the investor is the one who will shoulder the costs of the common area maintenance.  The roof and the structure are sometimes calculated as the reserve.  However, the double net lease is very rarely used in the real estate industry today because it is not much different from the triple net lease.

There is also a term called the bondable lease. This is also known as the hell or high water lease. You might wonder why this is termed as such but it is basically because it is the extreme variation of the triple net lease. Under this agreement, the tenant will be the one to shoulder all kinds of risks that are associated with the property.  Some of these responsibilities may even cover the responsibility to rebuild the building in case of casualty and to pay the rent in either partial of full condemnation.  These expenses must be covered by the tenant if the insurance proceeds from these unforeseen events are inadequate.  In addition, rent abatements are not possible under this lease agreement.  It is really no wonder then that very few people actually agree to this set-up.  It is much preferable to choose the triple net lease option instead.