Triple Net (aka NNN) is not a basketball or volleyball term, it’s perhaps the most powerful term in Commercial Real Estate. I’ll dumb it down for you, since it’s not exactly self-explanatory. Whether you’re a landlord or a tenant, triple net leases are one of the biggest keys to determining net operating income (NOI) and thus, value of the property. You can read a few articles about investing and types of investments if you so choose.
Basically, a NNN lease is a lease structure where the tenant pays a base rental rate, AND also pays additional rent to cover the landlord’s expenses for Taxes, Insurance, and Operating Expenses, which are the three “N”s in the NNN, unlike a “gross lease” where the tenant pays a single monthly rate and the landlord then pays for taxes, insurance, etc out of that payment. When looking at a flyer (like below), the rates are illustrated as a base rental amount (e.g. below $22-$28/sf/year) plus NNN fees (e.g. below $9.50/sf/year). In this case it’s office space, so that is generally represented as dollars per square foot per year. Retail, office, and medical spaces are generally represented in this manner, whereas Industrial/Warehouse type spaces are represented as dollars per square foot per month, not year. This matters when calculating the total monthly rent.
Using the snippet of a flyer below, here’s how one would calculate a total monthly rent for a 1,300 square foot space at $22/sf.
1,300 sq ft × ($22/sf + $9.50/sf NNN). 1,300 × 31.50 = $40,950/year. $40,950 ÷ 12 months = $3,412.50/month, total.
For an industrial property where the lease is represented monthly vs. annually, simply eliminate the last step of dividing by 12.
Investors can very quickly determine a property’s value simply using the base rental rate of a NNN lease (basically the Net Operating Income) and divide by desired Cap Rate. Read more about Cap Rates and NOI if you so dare!