Triple Net Leases: What is a Triple Net Property in California?

Disclaimer: I am not an attorney and this article is not intended as a substitute for advice from the appropriate legal, zoning, financial, construction and/or tax professionals. This information is provided for educational purposes only and is made without warranties or representations

There are several different kinds of leases out there, preferred by different people in different situations. One such lease type, called Triple Net, Net-Net-Net, or NNN, is often the preferred method of leasing for commercial landlords.

How does it work, why is it preferred, and is it any different in California versus the rest of the country? Let’s dig in.

What Is a Triple Net Lease and How Does it Work?

In order to understand what a triple net lease is, you need to know about each different kind of lease.

The basic kind of residential lease that many people are used to paying – where you pay a flat fee for rent each month, cover your own expenses for things like utilities and groceries, but leave property-related fees like maintenance and taxes to the landlord – is called a Gross Lease. These are generally not favored by commercial landlords but are standard in residential leasing.

If the tenant is responsible for any kind of additional fees that the landlord would normally charge, like property taxes, maintenance, or insurance, it’s called a Net Lease. There are three kinds of Net Leases, and given the name of one of them in the title of this post, you can probably guess them:

• Single Net Lease
• Double Net Lease
• Triple Net Lease

What makes the difference between them? There are three categories of expenses above and beyond rent that a property owner generally pays. These are property taxes, property insurance, and maintenance fees. 

Single net leases charge rent plus one of those three categories of expenses, usually property taxes. Double net leases charge rent plus two of the categories, often property taxes and insurance. And, of course, triple net leases charge rent plus all three additional categories; taxes, insurance, and maintenance.

There are two other kinds of leases you might see, called percentage leases and variable leases, but they’re more outside the scope of today’s discussion. If you’re interested in learning more about them, you can read a rundown here.

What Are the Benefits of Triple Net Leases?

If you look at the definition of a triple net lease and wonder why a tenant would sign up for one, you’re not alone. As Investopedia states:

“Net leases are just like owning property without actually having legal title over it. They are lease agreements between landlords and tenants where the tenant pays for rent and any other cost associated with the property in question. The agreement may include one or more expenses including insurance, property taxes, utilities, maintenance and repairs, and other operational costs.” – Investopedia.

So, why not just buy the property? If, as a tenant, you’re going to be paying everything anyway, it seems like there would be more benefits to owning the property outright than leasing it from a landlord who contributes virtually nothing but a name on the deed.

Well, there are a few benefits to a triple net lease for both the tenant and the landlord.

Firstly, for the tenant, the base rent is often much lower than it would be on a gross or lower net lease. Gross leases and other kinds of leases generally have higher rents because some amount of those additional fees are baked into the rental costs. If the landlord doesn’t have to cover property taxes, they can accept lower rent to still make their own profits.

For the landlords, a triple net lease relieves them of a lot of the work of managing a property. For hands-on property owners who like to be out there, at ground level, performing maintenance, arranging landscaping, and investing in improvements, it’s less relevant. For property investors, who want to own a revenue-generating property and pay as little attention to it as possible, a triple net lease allows them to offload the work of managing things like maintenance and taxes to the renter.

A triple net lease also gives the renter some flexibility and control over their expenses. Things like property taxes aren’t adjustable by the renter, but they can control some expenses by choosing their pick of maintenance vendors and insurance providers rather than just eating the costs of whoever the landlord picks.

Incidentally, this is why double net leases are also popular. By charging a slightly lower rent and allowing the tenant to choose their own maintenance vendors, it provides more flexibility and cost control for the renter while the landlord still pays for taxes and insurance.

Triple net leases are also generally long-term and potentially bonded, such that the tenant can’t get out of the lease easily, and the landlord can’t crank up the cost of rent over time beyond some stated maximum. By “long-term” here, I mean 10 or so years in general. Remember, these are commercial leases for things like big box stores. They expect to set up shop and do business for the long term.

Other benefits of a triple net lease include:

• Tenant stability. Given the length of the average NNN lease, vacancies are relatively rare outside of complete business catastrophes. Tenants enjoy a stable contract, and landlords enjoy not having to re-fill vacancies every few years.
• Low risk for the landlord. Property investors love NNN leases because they basically don’t have to do anything unless something goes terribly wrong.
• Tax benefits for tenants. Since the tenant is paying property taxes, they may be able to roll those expenses into their business and get tax breaks for it in other areas.

None of this really addresses why a business owner doesn’t just buy their building, though. That comes down to two reasons: finances and availability.

Financially speaking, many business owners are capable of leveraging month-to-month income to pay rents but wouldn’t be able to scrounge up the credit or value necessary to prove to a bank that they can get a loan sufficient to buy a parcel of commercial real estate. 

That’s secondary to the more important consideration, which is simply that many of the best parcels of real estate for a business to settle in are just not for sale. Even if the business owner has the finances necessary to buy, if no one is around to sell, there’s not much they can do about it.

For that matter, if you’re in the market for commercial property, or more importantly, if you’re the owner of a piece of commercial real estate and you’re interested in selling it, give me a call. I’m one of California’s top commercial real estate brokers, and I’d love to help you get the best deal you can get.

Are There Drawbacks to Triple Net Leases?

If triple net leases are so good, why are there other lease alternatives? As you might imagine, there’s never a universal solution, and there are valid reasons why a triple net lease might not be appropriate, either for the tenant or for the landlord.

First, a triple net lease locking in terms for 10-20 years has the potential to be a huge detriment to a commercial landlord. In a developing area or in an area where property values are increasing by leaps and bounds, a tenant locking in a lower rent for a long time can leave the landlord feeling like they’re losing a ton on rents. 

There’s also the risk of vacancy, default, and associated costs. If some catastrophe happens and the tenant business collapses – which happens all the time (consider Bed Bath and Beyond for a recent example) – the lease is broken regardless of the terms, and the landlord is left struggling to fill the space, usually for new lease terms, and often with plenty of work to do to refurbish and refresh the building for new tenants. Plus, since rents are lower, there’s less of a buffer for those vacant months.

Landlords also have to be aware that, since tenants are responsible for more than just rental fees, it’s possible that many tenants either can’t or don’t want to participate. A business that is solvent on its own just paying rent or rent + taxes in a single net lease might struggle when maintenance is added on. In particular, they may not be able to finance large-scale improvements and structural repairs (a new roof is a common example) and have no choice but to let the building degrade while they scrape together the funds. Rather than get into that situation, the tenant likely will avoid triple net leases in the first place.

As much as the landlord is able to offload most of the work, they also take on some level of risk, while suppressing the potential audience that might rent the property. It can also leave them struggling in times of economic hardship, as we’ve seen recently in the fallout from the pandemic.

Why do Commercial Landlords Prefer Triple Net Leases?

As is probably clear from all of the pros and cons above, landlords generally love triple net leases because they’re the absolute minimum amount of work they need to do, and the lowest possible expenses they have to cover, to keep a property as an investment.

The tenant is responsible for handling just about everything, and the owner simply handles some administrative decision-making about marketing the building, managing the paperwork, and so on.

“Commercial property landlords prefer triple net leases because they pass on the risk of unexpected costs to tenants. While landlords most often oversee the maintenance of the common areas, including maintaining insurance, paying property taxes, making improvements, and marketing the center to the public, they don’t have to worry about the costs related to these efforts. If there are unexpected increases in utility rates or insurance rates, the cost is generally absorbed by the tenants. If the commercial property’s value is reassessed, resulting in an increased property tax, the cost is generally absorbed by the tenants. With each tenant responsible for the expenses associated with their specific space and each tenant paying their pro rata share of the rest of the property’s expenses, landlords eliminate or at least limit their risk of unexpected costs.” – Donald R. Oder, San Diego Business Lawyer.

The biggest downside, of course, is the lower rate of return on the investment. Since there’s less flexibility in optimizing costs and less opportunity to raise rents, profits can be kept lower than they otherwise might be. It’s very much a question of whether the landlord values a more hands-on approach that maximizes profits in exchange for invested time or whether they simply want the mostly-passive investment.

That said, since it can be occasionally difficult to find tenants willing to sign up for a triple net lease over a gross or double net lease, some landlords find that double net leases are a better “sweet spot” between the total hands-off approach and something with more flexibility. This is especially true if the property is older, has a maintenance debt that needs addressing, or has a history of a lot of turnover and high vacancy rates.

Are Triple Net Leases Any Different in California?

Nope. A triple net lease is a triple net lease, whether you’re in New York, Florida, Minnesota, or California. 

Many property investors often view California as a place with unique rules and conditions, but the truth is, it’s just a huge state with a lot of variability depending on location. There are areas that are rapidly growing, others that are remaining relatively static, and others on the decline. There are cities with stricter regulations and others with laxer rules. Now and then, rules like San Diego’s tenant protection laws come into play, but realistically these are generally outside the scope of commercial real estate and apply mostly to residential rentals. 

If you’re a commercial property owner in California and you have an investment you’re tired of managing or want to offload, drop me a line. Similarly, if you’re in the market to buy a commercial property in California, I’m here to help. I’m the #1 SVN broker in California, and I’m here to help facilitate the best possible deals, no matter which side of the transaction you’re on.