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

A triple net lease, often referred to as an NNN lease, is a commercial real estate agreement where the tenant takes on significant financial responsibilities beyond the base rent. This type of lease is common in commercial real estate, particularly for single-tenant properties, retail spaces, industrial facilities, and office buildings. The primary goal of a triple net lease is to provide landlords with a more predictable and stable income stream by passing on variable property costs.

Components of a Triple Net Lease

The “triple” in triple net lease refers to the three primary categories of operating expenses that the tenant typically pays in addition to the base rent. These expenses are property taxes, building insurance, and common area maintenance (CAM). Tenants are generally responsible for their proportionate share of these costs, often determined by the size of their leased space relative to the total property size.

Property Taxes

Property taxes are levied by local government authorities based on the assessed value of the commercial property. These taxes can fluctuate annually depending on changes in the assessed property value and local tax rates.

Building Insurance

Building insurance covers the physical structure of the commercial property against various perils such as fire, vandalism, and natural disasters. It typically includes the main building, as well as permanently attached fixtures and equipment like HVAC systems and plumbing. The cost of this insurance can vary based on factors such as the property’s location, age, construction materials, and the type and amount of coverage needed.

Common Area Maintenance (CAM)

Common Area Maintenance (CAM) charges cover the costs associated with maintaining and operating the shared spaces within a commercial property. These common areas include elements like lobbies, hallways, elevators, parking lots, landscaping, and building security. CAM expenses can also encompass utilities for common areas, janitorial services, and management fees. The exact items included in CAM are negotiated and specified in the lease agreement.

Implications for Tenants

Tenants entering into a triple net lease assume direct financial responsibility for a significant portion of the property’s operating costs. While the base rent in a triple net lease is often lower than in other lease types, tenants must budget for these additional, potentially fluctuating, expenses.

The tenant gains a degree of control over their space and some associated costs. For instance, they might have input on maintenance decisions or even the choice of insurance providers. However, this control comes with the burden of managing and paying for these items directly. Tenants should meticulously review the lease agreement to understand which specific expenses are passed through and how they are calculated.

Negotiating caps on controllable CAM expenses or limits on increases in property taxes and insurance can help mitigate the risk of unforeseen cost escalations. Thorough due diligence, including an analysis of historical operating expenses, is prudent before committing to a triple net lease to understand financial obligations and potential liabilities.

Implications for Landlords

For landlords, the triple net lease structure offers a predictable and stable income stream. The landlord’s net operating income (NOI) becomes more consistent, minimizing exposure to the variable costs of property ownership by shifting much of the operational burden to the tenant.

This lease type also reduces the landlord’s day-to-day management responsibilities related to the property’s operation and upkeep. Tenants handle routine maintenance and repairs, making triple net leases an attractive option for investors seeking a more passive form of real estate investment.

Triple net leases often feature longer lease terms, typically ranging from 10 to 15 years. Many agreements also include built-in rent escalations, helping to hedge against inflation and secure future earnings. While landlords generally remain responsible for major structural repairs and capital expenditures, the transfer of most operating expenses makes this lease structure appealing.

Comparing Lease Types

Commercial real estate offers various lease structures, each defining different allocations of expenses between landlord and tenant. The primary differences lie in who bears the responsibility for property taxes, building insurance, and maintenance costs.

Gross Lease

A Gross Lease, also known as a Full-Service Lease, is the simplest arrangement for a tenant. In this structure, the tenant pays a single, all-inclusive rent amount, and the landlord is responsible for nearly all operating expenses, including property taxes, building insurance, and maintenance. This provides the tenant with predictable monthly costs, as their rent remains fixed regardless of fluctuations in these expenses.

Single Net Lease

A Single Net Lease (often referred to as an N Lease) shifts some of the expense burden to the tenant. In addition to base rent, the tenant typically pays for property taxes. The landlord generally retains responsibility for building insurance and common area maintenance costs. This arrangement offers a slightly lower base rent than a gross lease, reflecting the tenant’s assumption of property tax payments.

Double Net Lease

A Double Net Lease (NN Lease) expands the tenant’s responsibilities further. Under this agreement, the tenant pays base rent, property taxes, and building insurance premiums. The landlord, however, typically remains responsible for common area maintenance and structural repairs. This lease type is often used in spaces where tenants have more direct control over their individual units, such as certain industrial or warehouse properties.

Triple Net Lease

The Triple Net Lease (NNN Lease) represents the most extensive transfer of operating expenses to the tenant among these common commercial lease types. The tenant pays base rent plus property taxes, building insurance, and common area maintenance. This contrasts significantly with gross, single net, and double net leases, where the landlord retains more financial responsibility for the property’s ongoing expenses.