Does Triple Net Include Property Taxes?

Commercial lease agreements define base rent and responsibilities for property expenses. Confusion often arises regarding which party, landlord or tenant, is accountable for specific costs. This article clarifies how property taxes are handled within triple net leases, a common commercial lease structure.

Understanding Triple Net Leases

A triple net lease, or NNN lease, is a commercial property lease where the tenant assumes responsibility for a portion of the property’s operating expenses in addition to base rent. This structure contrasts with traditional leases by shifting financial obligations from the landlord to the tenant. The “triple” refers to three primary categories of operating expenses passed through to the lessee.

These three core expenses include property taxes, building insurance, and common area maintenance (CAM). Property taxes are assessments levied by local authorities on real estate. Building insurance covers the physical structure against perils like fire or natural disasters. Common area maintenance covers costs for operating and maintaining shared spaces within a commercial property.

CAM expenses encompass services and utilities for areas used by multiple tenants, including landscaping, parking lot upkeep, cleaning of common hallways, and utilities for shared facilities like lobbies or elevators. In an NNN lease, the tenant is directly responsible for these costs, which are added to their base rent payment. This arrangement means the tenant’s total occupancy cost extends beyond the monthly rental fee.

Property Taxes in Triple Net Lease Structures

In a triple net lease, property taxes are included as a tenant responsibility. The tenant is directly accountable for paying these taxes, either by reimbursing the landlord or, less commonly, by paying the taxing authority directly if specified in the lease. The financial burden of property taxes, insurance, and maintenance is transferred to the tenant.

Property tax payment often involves the landlord paying the bills and then billing these costs back to the tenant. Reimbursements are collected monthly or annually as part of the tenant’s total payment. Property tax increases directly impact a tenant’s overall occupancy costs. If property assessments rise, leading to higher taxes, the tenant’s total expense will increase.

Landlords prefer triple net leases because they offer a stable income stream and reduce administrative and financial risks. By passing on fluctuating costs like property taxes to the tenant, landlords gain predictability in their net rental income. The tenant’s share of property taxes is determined by their pro-rata share, calculated based on the square footage they lease relative to the total leasable area. For instance, a tenant occupying 10% of a building’s leasable space would be responsible for 10% of the total property tax bill.

How Other Lease Types Handle Property Taxes

Commercial real estate features several lease structures beyond the triple net lease, each with distinct approaches to handling property taxes and other operating expenses. These differences highlight the specific nature of NNN leases.

A gross lease, sometimes called a full-service lease, includes all operating expenses within a single, fixed rental payment. The landlord assumes responsibility for property taxes, building insurance, and maintenance costs. This structure offers tenants predictable monthly expenses, as they are not directly billed for fluctuating operational costs.

Modified gross leases represent a hybrid approach, sharing operating expenses between the landlord and tenant. The landlord covers the base property tax amount, but the tenant may be responsible for a proportional share of any increases in property taxes or certain other specific costs, such as utilities. The exact division of responsibilities is negotiated and outlined in the lease agreement, providing flexibility for both parties.

In a single net lease (N lease), the tenant pays base rent plus property taxes as their sole additional expense. The landlord retains responsibility for other operating costs, including insurance premiums and maintenance. This lease type transfers only one of the “nets” to the tenant.

A double net lease (NN lease) expands on the single net structure by making the tenant responsible for both property taxes and building insurance premiums, in addition to base rent. The landlord remains accountable for structural maintenance and common area upkeep. This arrangement shifts more financial burden to the tenant compared to a single net lease but less than a triple net lease.