What Is a Triple Net (NNN) Lease in Commercial Real Estate?
Unpack a core commercial lease structure where property operating expenses become the occupant's responsibility.
A triple net lease, often referred to as an NNN lease, is a common commercial real estate arrangement where the tenant undertakes significant financial responsibilities beyond just paying base rent, placing the burden of property-related operating expenses directly onto the tenant. It is a prevalent model for commercial properties, particularly for single-tenant buildings or retail spaces, allowing for a different allocation of financial risk and control between the landlord and the tenant. Under this agreement, the tenant pays a predetermined base rental rate, in addition to their share of specific property costs.
Understanding the Three Nets
The “three nets” in a triple net lease refer to property taxes, property insurance, and common area maintenance (CAM). Each represents a distinct category of operating expenses the tenant is responsible for covering.
Property taxes
Property taxes are real estate taxes levied on the property by local government entities. In a triple net lease, the tenant pays their pro-rata share of these taxes, which can include assessments or increases over the lease term.
Property insurance
Property insurance encompasses policies covering the physical structure of the building and general liability. Under this lease type, the tenant covers their proportionate share of the landlord’s insurance premiums, which safeguard against various risks.
Common area maintenance, or CAM
Common area maintenance, or CAM, covers expenses for maintaining and operating a property’s shared spaces. These areas include parking lots, lobbies, restrooms, hallways, landscaping, and security services. Typical CAM expenses often include cleaning, routine repairs, utilities for common areas, snow removal, and property management fees. Tenants usually pay a pro-rata share of these costs, calculated based on the percentage of total rentable square footage they occupy.
Implications for Tenants and Landlords
Triple net leases carry distinct financial and operational implications for both tenants and landlords, reshaping their responsibilities and potential benefits. This structure impacts their financial exposure and control.
For tenants
For tenants, a triple net lease often translates to a lower initial base rent, compensating them for additional financial obligations. Tenants gain more direct control over their operating costs and the appearance and upkeep of their leased space, including the ability to choose contractors for repairs. While base rent is predictable, other expenses like property taxes, insurance premiums, or unexpected maintenance needs can fluctuate, introducing variability to monthly outlays. The tenant’s pro-rata share, which determines their portion of shared expenses, is calculated by dividing their leased square footage by the building’s total rentable area. Tenants may also deduct these property expenses, such as taxes, maintenance, and insurance, as business expenses on their tax returns.
For landlords
For landlords, triple net leases offer a more predictable and stable net operating income, as variable expenses are passed through to tenants. This arrangement significantly reduces the administrative burden of day-to-day property expenses, allowing landlords a less hands-on approach to management. Shifting operating expense risks to tenants can also contribute to a higher capitalization rate for the property, making it a more attractive investment. While tenants are responsible for routine maintenance, landlords retain responsibility for major structural repairs, such as the roof or foundation. This lease type tends to attract established businesses with the financial stability to assume these additional responsibilities, leading to a more reliable tenant base.
Triple Net Compared to Other Leases
Comparing a triple net lease to other common commercial lease structures highlights its unique approach to expense allocation. The primary distinction lies in how property operating costs are distributed between the landlord and the tenant.
A gross lease
A gross lease, also known as a full-service lease, represents the opposite end of the spectrum from a triple net lease. In a gross lease, the tenant pays a single, all-inclusive rent payment, and the landlord covers most, if not all, of the property’s operating expenses, including taxes, insurance, and common area maintenance. This structure offers simplicity for the tenant, as budgeting is straightforward, but it results in a higher base rent to account for the landlord’s assumed costs.
A modified gross lease
A modified gross lease serves as a hybrid, blending elements of both gross and net leases. In this arrangement, the tenant pays a base rent along with some, but not all, of the property’s operating expenses. For instance, a landlord might cover property taxes and insurance, while the tenant is responsible for common area maintenance or utilities. The specific allocation of expenses in a modified gross lease is negotiable and can vary significantly depending on the agreement. A modified gross lease often includes a “base year” provision, where the landlord covers expenses up to a certain amount, and the tenant pays for any increases beyond that base year.