If you're entering the world of commercial real estate leasing, you'll inevitably encounter the term "triple net lease" or its abbreviated form, "NNN lease." This lease structure is one of the most common arrangements in commercial real estate, particularly for retail properties, single-tenant buildings, and certain office spaces. Yet despite its prevalence, many tenants and even some property owners don't fully understand how triple net leases work or what they're actually agreeing to when they sign one.
Understanding the ins and outs of a triple net lease is crucial because it fundamentally shifts the financial responsibilities between landlord and tenant compared to other lease types. Let's break down exactly what a triple net lease entails and what you need to know before signing on the dotted line.
A triple net lease is a lease agreement where the tenant assumes responsibility for three main categories of property expenses in addition to the base rent. These three categories—the "nets"—are:
Property Taxes: The tenant pays their proportionate share of the property's real estate taxes. In a single-tenant NNN lease, this means the tenant pays all property taxes. In a multi-tenant property, tenants typically pay based on their percentage of the total building square footage.
Property Insurance: The tenant covers the cost of insuring the building structure. This is separate from the tenant's own liability and contents insurance, which they would need regardless of lease type. In a NNN lease, this structure helps ensure the property is adequately protected while allowing landlords to offer more competitive base rents and giving tenants greater transparency into how insurance costs are calculated and managed.
Common Area Maintenance (CAM): The tenant pays for maintenance and repairs of common areas. This can include everything from landscaping and snow removal to roof repairs and parking lot maintenance. The scope of CAM charges is often where triple net leases become complex and sometimes contentious.
In a triple net lease, the landlord receives a predictable base rent, while most of the property's operating expenses are allocated to the tenant. In return, the tenant assumes greater responsibility for day-to-day operating costs in exchange for improved long-term stability and operational flexibility.
To truly understand triple net leases, it helps to see how they compare to other common commercial lease structures:
Gross Lease (Full Service Lease)
In a gross lease, the tenant pays a single rental rate that includes everything—base rent plus all operating expenses. The landlord is responsible for property taxes, insurance, and all maintenance costs. This is the simplest structure for tenants because you have one predictable monthly payment with no surprise expenses. Gross leases are common in multi-tenant office buildings where the landlord wants to maintain control over building operations and present tenants with straight forward pricing.
Modified Gross Lease
A modified gross lease falls somewhere between a gross lease and a triple net lease. In this arrangement, certain operating expenses are included in the base rent while others are passed through to the tenant. For example, the landlord might cover property taxes and insurance, but the tenant pays for utilities and their proportionate share of CAM charges. The specific terms vary widely and are negotiated based on the property and market conditions.
Double Net Lease
In a double net lease, the tenant pays base rent plus property taxes and insurance, but the landlord typically retains responsibility for structural repairs and maintenance. This is less common than triple net or gross leases but can be found in certain markets and property types.
Absolute Triple Net Lease
An absolute triple net lease (also called a bondable lease) takes the NNN structure to its extreme. The tenant is responsible for absolutely everything, including structural repairs, roof replacement, and even rebuilding the property if it's destroyed. These leases are typically found in single-tenant properties leased to creditworthy national tenants and are popular with real estate investors seeking truly passive income with zero landlord responsibilities.
Triple net leases are particularly common in certain segments of commercial real estate:
Retail Properties
NNN leases dominate the retail sector, especially for freestanding single-tenant buildings occupied by national chains like fast-food restaurants, pharmacies, banks, and convenience stores. These tenants often prefer triple net leases because they want control over maintenance and operations. A national restaurant chain, for example, needs to maintain its brand standards and can't rely on a landlord to keep the property to their specifications.
Single-Tenant Industrial Buildings
Manufacturing facilities and distribution centers are frequently leased under NNN terms, particularly when a single tenant occupies the entire building. The tenant has specific operational needs and often prefers to manage the property themselves rather than coordinate with a landlord.
Medical and Professional Buildings
Some medical office buildings and professional office spaces use triple net or modified triple net leases, though this varies by market and property type. In these cases, the tenant's share of expenses is typically calculated based on their percentage of the total building square footage.
Triple net leases come with great benefits for tenants and understanding these can help you negotiate better terms or decide if this lease structure is right for your business.
Lower Base Rent: Because tenants are assuming operating expenses, the base rent in an NNN lease is typically lower than in a gross lease for a comparable property. This can be advantageous for cash flow management and can make a property appear more affordable initially.
Control Over Maintenance: Tenants have greater control over how and when maintenance is performed. If you have specific standards or preferences for property upkeep, you're not dependent on a landlord's schedule or priorities. This can be particularly important for businesses where the property condition directly impacts their brand image.
Potential Tax Benefits: The additional expenses you pay under an NNN lease are typically fully deductible as business expenses, just as your base rent would be. This can provide some tax advantages, though you should consult with your accountant about your specific situation.
Transparency: You know exactly what you're paying for. Rather than having operating costs built into your rent with no visibility, you can see the actual expenses and potentially identify ways to reduce costs through efficient management.
Before signing a triple net lease, you need to carefully review several key areas where discrepancies commonly arise:
CAM Charge Definitions
The lease should clearly define what constitutes a CAM charge to ensure both parties have a shared understanding of which expenses are included. Reviewing this language carefully helps avoid confusion about how costs are allocated. Common areas of clarification include capital improvements, administrative expenses, and costs related to vacant spaces. Where appropriate, tenants and landlords may agree on specific exclusions to align responsibilities with the terms of the lease.
Ask for the property's historical CAM charges for the past three to five years. This gives you insight into what to expect and helps you identify any red flags. Suddenly spiking expenses or unusually high charges might warrant investigation and conversation.
Structural vs. Non-Structural Repairs
Clearly delineate which party is responsible for structural repairs. A standard triple net lease might have the tenant covering routine maintenance but the landlord covering structural issues like foundation problems or major roof repairs. However, some NNN leases make the tenant responsible for everything. Know what you're agreeing to and negotiate accordingly.
CAP on Increases
Consider negotiating caps on annual increases in operating expenses, particularly for controllable expenses like management fees or certain maintenance costs. While you can't cap property tax increases (those are set by the government), you might be able to limit how much certain discretionary expenses can increase year-over-year.
Audit Rights
Ensure your lease includes the right to audit CAM charges. This allows you to review the landlord's accounting and verify that charges are accurate and in accordance with the lease terms.
Calculation Methodology
In multi-tenant properties, understand exactly how your share of expenses is calculated. Is it based on rentable square footage or usable square footage? How is vacancy handled—do existing tenants pay more when space is vacant, or does the landlord absorb those costs? These details can significantly impact your expenses.
Triple net leases are neither inherently good nor bad—they're simply a different way of structuring the financial relationship between landlord and tenant. For some businesses, particularly those that want control over their property and have the resources to manage maintenance and expenses, NNN leases can be an excellent option. For others, especially smaller businesses or those without facilities management experience, the unpredictability and administrative burden might outweigh any rent savings.
The key to success with a triple net lease is understanding exactly what you're agreeing to before you sign. That means reading the fine print, asking questions about anything unclear, reviewing historical expenses, and negotiating terms that protect your interests. A seemingly small clause about who's responsible for roof repairs or how CAM charges are calculated can have massive financial implications over a 10 or 15-year lease term.
Don't be intimidated by the complexity of triple net leases, but don't rush into one without proper due diligence either. Work with experienced professionals—attorneys, brokers, and accountants who understand commercial real estate. Their expertise can help you negotiate a fair deal and avoid costly surprises down the road.
With proper preparation, professional guidance, and careful negotiation, a triple net lease can be a win-win arrangement that gives you the space you need on terms that work for your business. The goal isn't to avoid NNN leases —it's to enter into them with understanding.
