What Is a Triple Net (NNN) Lease?

A triple net lease separates what you pay for the space from what it costs to own and run the building. Base rent is the first part. The three nets are the second, and each is a cost the landlord would otherwise carry.

• Property taxes: your share of the real estate tax bill on the building and land.
• Insurance: your share of the premium on the landlord’s policy for the building. This is separate from the coverage you carry for your own business. In some leases, the tenant’s obligation can reach deductibles and claims, so read that language.
• Maintenance: the upkeep of the property, usually billed in multi-tenant buildings as common area maintenance, or CAM. This covers items such as parking lot upkeep, snow removal, landscaping and repairs to shared systems.

In a single-tenant building, you may pay some of these bills directly. In a multi-tenant building, the landlord normally pays them and bills each tenant a proportionate share based on the area it occupies. A triple net lease does not usually cover your own suite costs either, so electricity and cleaning may be yours on top of everything above.

Tenants tend to assume "triple net" has one fixed meaning. It does not, and the difference can be expensive. The clearest example is the roof and structure.

Published explanations from the investment side of the industry disagree on this point. Some describe a triple net tenant as paying for maintenance of the roof, structure and common areas. Sands Investment Group says landlords usually remain responsible for major structural components and significant capital spending, such as the roof, exterior walls, foundation and parking lot resurfacing. Both are describing leases called triple net.

A tenant should draw one conclusion from that. A broker’s flyer that says "NNN" tells you very little about who replaces a failed rooftop unit in year four. Only the repair, maintenance and operating expense sections of the lease answer that, and those sections are negotiable before you sign.

When you see NNN on a listing, treat it as a starting question: which costs, in which amounts, and who pays for capital replacements?

Landlords and their investors favor net leases for understandable reasons. Costs move to the tenant, so the income is more predictable, the owner has less day-to-day management to do, and lenders may view the property as lower risk. None of that is unfair, but it does tell you where the risk has gone.

Under a gross lease, the landlord carries much of the risk of rising costs and builds that risk into the rent. Under a triple net lease, you hold it from the first dollar, because your payment is tied to the building’s actual costs and not to a baseline. If the tax bill or the insurance premium rises, your payment rises too. Epstein Becker Green notes that controllable costs typically exclude utilities, snow removal, insurance and real estate taxes, which is also why they are often left out of negotiated caps.

The benefit to you is a lower quoted base rent and, in some buildings, a clearer view of what the property actually costs to run. Whether the total is lower than a gross alternative is an arithmetic question, and our worked example guide shows how to run it.

The nets are usually paid in two steps. The landlord estimates the year’s costs in advance and you pay that estimate in monthly installments with your base rent. After the year closes, the landlord compares the estimates with actual costs and reconciles them. If actual costs ran higher, you owe the difference. If they ran lower, you receive a credit.

Two practical points follow. First, your budget should allow for a true-up bill that arrives after the year it relates to. Second, a low estimate in a proposal is only an estimate. It does not limit what you will be billed unless the lease says so, so a landlord’s optimistic number can make one building look cheaper than it is.

A listing that reads "$20.00 NNN" is quoting base rent per rentable square foot per year, with the nets on top. The figures in this guide are hypothetical, for illustration. To turn a quote into something you can compare, work through these steps.

1. Ask for the current estimate of taxes, insurance and CAM, per rentable square foot, in writing.
2. Ask for several years of actual figures, because the history tells you more than a single estimate.
3. Add base rent and the estimated nets to get a total rate. A hypothetical $20.00 base plus $8.00 of nets is $28.00 per rentable square foot per year.
4. Multiply by your rentable square feet and divide by 12 for the monthly cost before utilities and cleaning.
5. Add what the nets leave out, including suite electricity, janitorial service and repairs to equipment that serves only your space.
6. Compare that total, over the full term, with any gross or modified gross alternative.

When you are shown several buildings, ask each landlord the same questions so the answers line up.

• ✓Does the lease make us responsible for roof, structure or parking lot work, and is that repair or full replacement?
• ✓Who replaces the heating and cooling equipment that serves our space?
• ✓How are capital costs passed through, and over how many years are they spread?
• ✓Which costs are excluded from CAM, and are the exclusions written in the lease?
• ✓Is there a cap on increases in controllable expenses?
• ✓Do we have the right to review the landlord’s records after a reconciliation?
• ✓How is our proportionate share calculated, and can it change?

You are most likely to meet triple net terms when looking at retail, industrial, flex and single-tenant space, and in some suburban office buildings. Conventions vary by market and landlord, so ask how each building quotes rather than assuming. When a company compares a net-leased space with a gross-leased office, the two quoted rents are not measuring the same thing, and setting them side by side misleads.

At Tenant Advisory Group we represent tenants, so when a client is considering a NNN building we ask for the expense history, restate the option as total occupancy cost and mark up the repair and capital language before the letter of intent is signed. Have your attorney review the final wording, because state law and the lease’s own definitions decide what is actually owed.