Accounting Concepts and Practices

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

Understand what a triple net lease is and how this common commercial real estate agreement shifts property operating expenses to the tenant.

A triple net lease, often abbreviated as NNN, is a common commercial real estate structure where the tenant undertakes a substantial portion of the property’s operating expenses. This arrangement goes beyond simply paying rent, as the tenant assumes direct responsibility for specific costs associated with the property. It is widely utilized in commercial settings, particularly for single-tenant buildings like retail stores or industrial facilities, establishing a distinct financial relationship between landlord and tenant.

What is a Triple Net Lease

A triple net lease fundamentally shifts the burden of property-related expenses from the landlord to the tenant. The term “net” signifies that the tenant pays certain operating expenses directly, or reimburses the landlord, in addition to the base rent. The “triple” refers to three primary categories of these expenses: property taxes, building insurance, and common area maintenance (CAM). This structure provides landlords with a more predictable and stable income stream, as variable costs are largely passed on to the tenant. This insulation from variable costs is a key benefit for landlords.

This arrangement means the landlord receives a consistent net rental income, insulated from fluctuations in these operating costs. Landlords often favor this lease type due to reduced administrative burden and financial risk, as the tenant manages and pays for many day-to-day property expenses. For tenants, while they take on more financial responsibility, the base rent in a triple net lease is typically lower than in other lease types to account for these additional obligations, enabling more control over occupancy costs and property upkeep.

The Three Core Expenses

The “triple” in a triple net lease refers to property taxes, building insurance, and common area maintenance (CAM), each a significant financial obligation for the tenant. Property taxes, assessed by local government authorities, are typically the tenant’s responsibility. These taxes are usually based on the assessed value of the building and land, and the tenant pays their proportionate share if leasing only a portion of the property.

Building insurance is another core expense covered by the tenant, encompassing the cost of insuring the physical structure of the building itself. This coverage protects against damage from events such as fire or storms, but it typically does not include the tenant’s personal property or business contents. The tenant ensures the building remains adequately insured, fulfilling a protective role for the property.

Common Area Maintenance, or CAM, charges cover the costs associated with maintaining shared spaces and services within a multi-tenant property. These expenses can include landscaping, parking lot repair and lighting, snow removal, security services, utilities for common areas like lobbies or restrooms, and management fees. These charges are typically reconciled annually, meaning tenants may receive a refund or an additional bill based on actual expenditures.

Triple Net Leases Versus Other Lease Types

To understand the distinct nature of a triple net lease, it is helpful to compare it with other common commercial lease structures, such as gross leases and modified gross leases.

A gross lease, also known as a full-service lease, is an arrangement where the tenant pays a single, fixed rental amount, and the landlord is responsible for nearly all operating expenses. This includes property taxes, building insurance, and common area maintenance, offering the tenant a predictable, all-inclusive monthly payment. The base rent in a gross lease is typically higher to cover these landlord-borne costs.

A modified gross lease represents a hybrid approach, blending elements of both gross and net leases. In this agreement, some operating expenses are passed through to the tenant, but not all three “nets” (taxes, insurance, and CAM). For instance, a landlord might cover property taxes and insurance, while the tenant is responsible for CAM. This provides a middle ground where financial risks are shared.

The triple net lease places responsibility for all three core expenses—property taxes, building insurance, and common area maintenance—squarely on the tenant, in addition to the base rent. This structure significantly reduces the landlord’s ongoing financial obligations. While the tenant shoulders more variable costs, the base rent is often lower than in gross or modified gross leases.

Other Tenant Obligations

Beyond the defining “three nets” of taxes, insurance, and common area maintenance, tenants in a triple net lease typically assume several other operational responsibilities for their leased space. Tenants are accountable for their own utility consumption, which includes electricity, water, gas, and internet services within their specific unit. These costs are directly metered to the tenant or allocated based on their usage, ensuring they pay for their direct consumption.

Interior maintenance and repairs within the leased premises generally fall under the tenant’s purview. This includes routine upkeep, such as plumbing fixes, electrical repairs, and maintaining the general condition of the interior space. Tenants are also responsible for janitorial services for their own unit, ensuring the cleanliness and upkeep of their specific operating area.

The lease agreement may also stipulate tenant responsibility for minor structural repairs or specific equipment maintenance that directly serves their space, such as HVAC system upkeep for their unit. While major structural components like the roof or foundation are typically the landlord’s responsibility, the tenant’s obligations extend to day-to-day operational aspects that ensure the functionality and appearance of their occupied area.

Previous

What Are YTD Earnings and Where Can You Find Them?

Back to Accounting Concepts and Practices
Next

How to Calculate Contribution Margin Ratio