What Is a Triple Net (NNN) Lease and Who Pays for What?

A commercial lease is a legally binding contract that grants a business tenant the right to use a property for commercial activities over a specified period. These agreements outline the rights and responsibilities for both the landlord and the tenant. Different types of commercial leases exist, each distributing property-related expenses and obligations uniquely between the parties. One common and significant lease structure is the Triple Net (NNN) lease.

Understanding the Triple Net Components

A Triple Net (NNN) lease requires the tenant to pay a base rent along with a proportionate share of three primary property expenses: real estate taxes, building insurance, and common area maintenance (CAM). The “net” in NNN signifies that these expenses are passed through to the tenant. Tenants are responsible for paying a pro-rata share of the property taxes, which are assessments levied by local governments to fund public services. These taxes can fluctuate based on property valuations and local tax rates, meaning the tenant’s share may also change over time.

Tenants also cover a pro-rata share of the building’s insurance premiums. This includes property insurance that protects the building’s structure against damage or loss, along with liability insurance for accidents that might occur on the premises. The third component, Common Area Maintenance (CAM), covers expenses for shared spaces and services that benefit all tenants. This can include costs for maintaining parking lots, landscaping, common utilities, security, and janitorial services for shared areas.

These three net expenses are calculated on a pro-rata basis, meaning the tenant pays a percentage based on the square footage they occupy. For instance, if a tenant occupies 20% of a building, they would be responsible for 20% of these shared costs. Landlords often estimate these charges annually and bill them monthly, with an annual reconciliation to adjust for actual costs incurred.

Tenant Financial Responsibilities

Under a Triple Net (NNN) lease, tenants assume a substantial portion of the property’s operating expenses beyond the base rent. Tenants are also responsible for their own utility costs, such as electricity, water, gas, internet, and trash removal, which are often metered individually for their leased space. This direct payment gives tenants control over their consumption and related expenses.

Furthermore, tenants bear the cost of interior maintenance and repairs within their specific leased unit. This encompasses routine upkeep, non-structural repairs, and maintenance of internal systems like HVAC units and plumbing fixtures that serve only their space. The exact scope of these responsibilities is detailed in the lease agreement, making it important for tenants to thoroughly review the terms. While the NNN structure shifts many financial burdens to the tenant, it can also lead to a lower base rent compared to other lease types. Tenants should budget for these variable operating expenses, which can fluctuate year to year.

Landlord Responsibilities

While Triple Net (NNN) leases shift many property-related costs to the tenant, landlords retain specific financial and maintenance obligations. Landlords are responsible for major structural repairs to the building, such as the roof, foundation, and exterior walls. These significant repairs are distinct from the routine maintenance handled by tenants.

Landlords also cover capital expenditures, which are substantial investments for upgrades or replacements that enhance the property’s value or extend its useful life. Examples include replacing an entire HVAC system or modernizing elevators. Although some capital expenditures might be amortized and passed through to tenants over their useful life, the primary financial burden often remains with the landlord. The landlord is also responsible for any mortgage payments on the property. Beyond these financial aspects, landlords maintain responsibility for overall property management and ensuring compliance with building codes and regulations.

How NNN Leases Differ from Other Types

Triple Net (NNN) leases represent one specific approach to allocating commercial property expenses, differing significantly from other common lease structures. In a Gross Lease, also known as a Full Service Lease, the tenant pays a single, inclusive rent amount. The landlord covers nearly all operating expenses, including property taxes, insurance, and common area maintenance. This structure offers simplicity and predictability for the tenant, though the base rent is higher to account for the landlord’s absorbed costs.

A Modified Gross Lease is a hybrid structure where the landlord and tenant share responsibility for operating expenses. The specifics of expense allocation vary widely based on negotiations, but often the tenant pays base rent plus some utilities or a proportional share of certain operating costs, while the landlord covers others like property taxes, insurance, or major maintenance. This lease type aims to balance predictability and flexibility.

Net Leases are a broader category where the tenant pays a portion or all of the property’s operating expenses in addition to rent. A Single Net (N) Lease requires the tenant to pay base rent plus property taxes. The landlord remains responsible for building insurance, common area maintenance, and structural repairs.

A Double Net (NN) Lease expands the tenant’s responsibility to include base rent, property taxes, and building insurance. In this arrangement, the landlord still covers common area maintenance and structural repairs. The Triple Net (NNN) lease places the most significant share of operating expenses on the tenant, encompassing taxes, insurance, and maintenance, distinguishing it from these other lease types.