A triple net lease (NNN) is a prevalent commercial real estate agreement where the tenant pays a base rental rate plus a proportionate share of the property’s operating expenses. These expenses typically include real estate taxes, building insurance, and maintenance costs. This structure is widely used in commercial sectors like retail centers, industrial facilities, and single-tenant buildings. The NNN model transfers the majority of a property’s financial risk and operating burden from the landlord to the tenant.
Defining the Triple Net Lease Structure
The triple net lease establishes a lower base rent compared to other lease types because the tenant covers the fluctuating costs associated with the property’s operation. The term “net” signifies that the expense is paid separately from the landlord’s base rental income, providing the property owner with a more predictable and stable cash flow. The tenant absorbs the variability of expenses like tax increases or insurance premium hikes.
This arrangement shifts the financial exposure and management duties for the property to the lessee. Tenants are responsible for their pro-rata share of these expenses, calculated based on the percentage of the total building square footage they occupy. While the base rent is fixed, the additional rent covering operating expenses is variable and subject to annual reconciliation based on actual costs incurred.
The Three Components of the Triple Net
The “triple net” refers to the three distinct categories of operating expenses the tenant pays in addition to the base rent: property taxes, property insurance, and Common Area Maintenance (CAM).
Property Taxes are ad valorem taxes calculated by the local government based on the property’s assessed value. Under an NNN lease, the tenant pays their share of the annual tax bill. Since assessments fluctuate, this expense introduces volatility to the tenant’s total monthly occupancy cost.
Property Insurance covers the premiums for hazard and liability insurance protecting the physical structure of the building. The tenant pays a portion of this premium, which protects the landlord’s investment against damage. Tenants are typically required to maintain their own insurance for the contents of their leased space.
Common Area Maintenance (CAM) covers the expenses for operating, repairing, and maintaining areas used by all tenants. CAM charges typically include landscaping, snow removal, parking lot maintenance, security, shared utilities, and janitorial services for common spaces. Administrative fees and property management salaries related to common areas are also frequently passed through to the tenant. The specific details of what is included in CAM must be carefully reviewed in the lease agreement.
Comparing NNN to Other Commercial Leases
The NNN lease is one of three primary structures used in commercial real estate, defined by how operating expenses are allocated. The Full Service or Gross Lease is the opposite structure, where the tenant pays a single, all-inclusive rental rate. In a Gross Lease, the landlord assumes responsibility for virtually all operating expenses, including taxes, insurance, and maintenance, resulting in a higher base rent but offering the tenant maximum budget predictability.
The Modified Gross Lease acts as a middle ground, blending elements of both the NNN and Gross structures. In this arrangement, the tenant pays a base rent plus a negotiated portion of the operating expenses. For example, the tenant might cover utilities while the landlord retains responsibility for property taxes and insurance. This structure allows for a customized split of financial risk, often seen in multi-tenant office buildings.
Benefits and Risks of an NNN Lease for Tenants
The NNN lease structure offers several practical advantages for a business, starting with a lower base rental rate. This reduced upfront cost improves initial cash flow compared to a gross lease. Tenants also gain more control over the property’s upkeep and vendor selection, allowing them to manage maintenance standards and costs for their leased space and common areas.
The financial risk for the tenant is the lack of predictability in their total monthly payment. Since the tenant is responsible for operating expenses, they are exposed to fluctuations from unexpected increases in property taxes, insurance premiums, or unforeseen maintenance costs. For instance, an unexpected roof repair or a sudden spike in the property’s tax assessment can increase the tenant’s share of the operating costs, requiring careful budgeting.
Critical Lease Clauses and Hidden Costs to Negotiate
Tenant negotiation is necessary in an NNN lease to mitigate the financial risks associated with variable operating expenses. Key clauses must be addressed before signing.
Excluding Capital Improvements
Tenants should ensure the exclusion of capital improvements from the Common Area Maintenance (CAM) charges. Tenants should not be required to pay for major structural upgrades, such as a new roof or a complete HVAC system replacement. These items should be considered the landlord’s long-term investment, not a routine operating expense.
Negotiating Expense Stops or Caps
Tenants should seek to negotiate expense stops or caps, particularly on controllable operating costs like management fees and administrative charges. A cap limits the amount of increase in a tenant’s share of these expenses year over year. This protects the business from unexpected spikes and incentivizes the landlord to control certain costs.
Securing Audit Rights
Securing audit rights is a safeguard that allows the tenant to review the landlord’s books and records related to the CAM reconciliation statement. This right ensures that the property’s operating expenses are accurately calculated. It prevents the tenant from being overcharged for costs that should have been excluded.
Defining Pro-Rata Share
The lease must clearly define the method for calculating the tenant’s pro-rata share. This share is the percentage of the total building expenses the tenant is responsible for paying, typically based on leased square footage.