What is an example of a net lease?
Triple Net Lease Meaning
It is also referred to as NNN lease (net net net), emphasizing the payment of three operating expenses. Therefore, the amount of rent is kept lower than gross lease agreements. In regular lease agreements, the owners take care of property tax, insurance, and maintenance costs.
You are free to use this image on your website, templates, etc, Please provide us with an attribution linkArticle Link to be Hyperlinked How Does Triple Net Lease Work?In a triple net (NNN) lease, the lesseeA Lessee, also called a Tenant, is an individual (or entity) who rents the land or property (generally immovable) from a lessor (property owner) under a legal lease agreement. read more (tenant) agrees to pay three necessary expenses pertaining to the leased real estate—maintenance cost, insurance, and taxes. In contrast, a normal lease agreement requires landlords to bear those overheads. The lease amount is calculated using the capitalization rateCapitalization Rate is the rate that helps determining value of a real estate investment. It projects the expected rate of return on the investment made. read more—it determines the rate of return expected by a real estate investor. This rate depends largely on the tenant’s credibility. In an NNN agreement, the base rent value is often low—as tenants spend considerably on other expenses. Also, the tenant has the facility to add a maximum limit to the expenditure; this way, the lessee can manage fluctuations in overhead. If the cost of maintenance, insurance, and tax cross the limit, the landlord will pay part of the expense. NNN is a great leasing option for landlords since they get rid of property maintenance fees, insurance, and taxes. However, to actualize these benefits, the lease must be long-term—10 to 15 years. A lease agreement should also have a clause for a yearly escalation in the lease amount to ensure optimum returns. Small investors, the ones without prescribed incomes or net worthThe company's net worth can be calculated using two methods: the first is to subtract total liabilities from total assets, and the second is to add the company's share capital (both equity and preference) as well as reserves and surplus.read more, can also enter NNN lease agreements. In order to participate in the NNN lease, small investors are required to invest in Real Estate Investment Trusts (REITs) that include similar properties in the portfolios. CalculationThe formula for computing the lease amount in a triple net lease is given below: Lease Amount = (Base Rent+Common Area Maintenance+Property Tax+Property Insurance)/12 Here, Base Rent=Rent Per Square Feet×Total Leased Area The steps for determining NNN lease amount are as follows:
ExampleAndrea leases a commercial building of 10000 square feet to the business entity XYZ Ltd.— for office space. It is a NNN lease, and the ascertained monthly rent of $ 0.25 per square foot was charged. For the office, annual common area maintenance costs $1200, property tax costs $ 600, and the yearly real estate insurance payable costs $1200. Now, determine the monthly lease amount. Solution: Lease Amount = (Base Rent + Common Area Maintenance + Property Tax + Property Insurance) / 12 Base Rent = Rent Per Square Feet × Total Leased Area Base Rent = (0.25 × 12) × 10000 = $30000 Lease Amount = (30000 + 1200 + 600 + 1200) / 12 Lease Amount = 33000 / 12 = $2750 Thus, XYZ Ltd. paid Andrea a monthly lease amount of $ 2750. Triple Net Lease Pros and ConsThe NNN lease has numerous advantages to the landlord and the tenant, as discussed below:
NNN lease disadvantages are as follows:
Triple Net Vs. Gross LeaseIn a gross lease, tenants pay a single fixed payment to the landlord (including rent). The landlord bears all other costs—property tax, insurance, maintenance, and other ancillary expenses. You are free to use this image on your website, templates, etc,
Please provide us with an attribution linkArticle Link to be Hyperlinked In a modified gross lease, the tenants cover a proportionate share of property taxes, insurance premiums, and maintenance expenses—in addition to the basic rent at the start of the lease. A modified lease is majorly used in the case of commercial properties where there is more than one tenant to share the property. The following comparison chart will help us distinguish between a triple net lease and a gross lease:
Frequently Asked Questions (FAQs)What is a triple net lease? A NNN lease is a rental agreement between a landlord and a tenant. The latter pays off maintenance charges, real estate insurance, and property taxes—in addition to rent. How do you calculate the triple net lease? The NNN lease is computed as the sum of base rent amount, property maintenance charges, tax, and insurance divided by the total number of months in the year, i.e., 12. The base rent amount is the per square feet rent multiplied by the total leased area (in square feet). What is the difference between net and triple net leases? In a net lease, the lessee only pays property tax and rent. In a NNN lease, the lessee incurs multiple costs—property maintenance expense, tax, insurance, and rent. Triple Net Lease VideoRecommended ArticlesThis has been a guide to what is Triple Net Lease & its meaning. Here we explain triple net lease definition, property sale, calculation, pros, cons, examples & triple net lease vs. gross lease. You can learn more about accounting from the following articles –
What is an example of a lease?An example of lease is when you rent your apartment out to a tenant. An example of lease is when you decide to rent an apartment to live in. A contract by which one party (landlord, or lessor) gives to another (tenant, or lessee) the use and possession of lands, buildings, property, etc.
Why is it called a net lease?In a net lease, the property owner receives the rent "net" after the expenses that are to be passed through to tenants are paid. In a gross lease, the tenant pays a gross amount of rent, which the landlord can use to pay expenses or in any other way as the landlord sees fit.
What are the 3 common types of leases?The three most common types of leases are gross leases, net leases, and modified gross leases.. The Gross Lease. The gross lease tends to favor the tenant. ... . The Net Lease. The net lease, however, tends to favor the landlord. ... . The Modified Gross Lease.. What is the major difference between a gross and an net lease?A net lease is the opposite of a gross lease in terms of payment for utilities, taxes, repairs and any other additional expenses. In a net lease, the predetermined rent is typically lower and the additional costs aren't included in that set rate.
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