Understanding the Triple Net Lease
LoopNet revised this article on August 5, 2021.
If you're a tenant looking to lease commercial real estate — such as office, industrial, retail or restaurant space — you may notice landlords offering space for lease on a triple net basis. Triple net (or NNN) leases provide tenants with enhanced transparency and control over expenditures. This type of agreement is one of several “service types” commonly found in commercial real estate leases; service type refers to how tenants pay for expenses related to occupying a building, such as utilities, maintenance, taxes and insurance.
Service types range from “full-service” to “triple net,” with a host of formats in between. In general, at one end of the spectrum is a full-service lease. Under a full-service structure, a tenant pays a fixed amount to a landlord each month to cover their base rent plus their pro-rata share of all operating costs in the building.
At the other end is a triple net lease.
What Is a Triple Net Lease?
A triple net lease is a type of commercial real estate lease in which the tenant pays a base rent to the landlord and pays their own operating expenses directly to the relevant service and utility providers. The “N” stands for “net of” or exclusion of certain expenses which typically include utilities, property taxes, building insurance, and maintenance or repairs in common areas of the building.
True triple net leases are typically executed by tenants that occupy an entire building, but they are executed in multi-tenant buildings as well. Landlords that carry out triple net leases in multi-tenant buildings typically have tenants pay for in-suite utilities — cleaning and trash collection, for instance — directly and charge tenants some fixed amount to cover shared costs relating to taxes, insurance, maintenance, etc.
Caveats for a Triple Net Lease
No standard lease . Before continuing, it’s important to note that there is no such thing as a standard lease in commercial real estate; each lease is negotiated individually and structured to consider the needs of each landlord and tenant, as well as the unique conditions of each building. The information below is a high-level overview of the triple net lease.
Triple net leases for multi- and single-tenant buildings. Triple net leases can be executed in either a multi- or single-tenant building. However, in a single tenant building, the tenant often assumes responsibility for not just operational expenses but also for capital expenditures relating to elements such as the HVAC system, the roof and the parking lot. This is often the case for a retailer or restaurateur that has executed a long-term lease at a property. In order to establish and grow a strong repeat customer base, a business may lease space in a location for decades, upgrade the building — both inside and outside as needed — and pay just a base rent to the landlord.
A tenant sharing a building with other tenants is not likely to take on capital expenditures as their ties to the building or location may not be as crucial to their business.
Six Key Elements of a Triple Net Lease
1. Base rent: This is a basic rent figure that excludes additional costs related to working in a building, such as utilities, building maintenance, building taxes, etc. Base rent is typically quoted on an annual per-square-foot basis, so a tenant occupying 2,000 square feet at a base rent of $10 per square foot would pay $20,000 annually in base rent.
2. Utilities: This category can include electric, gas, water, sewer, etc. Typically, if a landlord offers a triple net lease arrangement, it is because individual metering is available at the building, enabling the tenant to pay utility providers directly. If master-metering is the only option, the landlord will devise a way to apportion costs, as best they can, based on each tenant’s usage, and these formulas or methodologies should be detailed in the triple net lease.
3. Cleaning expenses: As one might expect, these include costs related to janitorial services, trash collection, recycling, vacuuming, etc. in both common areas and tenant spaces. Tenants pay for the full cost of cleaning their direct space and a pro-rata share of the costs incurred to clean common areas.
4. Real estate taxes: Taxes are based on the assessed value of the building and paid roughly once a year. The tenant pays a pro-rata share of the building's property tax, meaning each tenant pays a portion of the total tax bill based on the percentage of building space they lease. So, if a tenant occupies 20,000 square feet in a 100,000 square foot building, they will pay 20% of the tax bill. Each tenant pays their share to the landlord who pays the full amount of tax to the municipality.
5. Property insurance: This is insurance held by the landlord to offset claims against building damage, accidents, etc. Similar to real estate taxes, each tenant pays a pro-rata share of the total premiums based on the percentage of the building leased by that tenant. Tenants pay their portion of premiums to the landlord who pays the insurance provider directly.
6. Common area maintenance costs: Often referred to as CAM, these are expenses incurred to operate and maintain the common areas of a building, including lobbies, exercise rooms, restrooms, shared conference rooms, elevator lobbies, landscaping and parking lots. Expenses incurred typically relate to utilities, cleaning, maintenance and property management. Each tenant pays a pro-rata share of the total costs based on the percentage of the building leased by the tenant.
What are the Tenant Benefits of a Triple Net Lease?
Pay your fair share. The major benefit of a triple net lease is that each tenant in a building pays their fair share of expenses. Expenses are paid directly by the tenant that incurred them, rather than totaled and divided among all tenants in a building. This means a light user of utilities is not burdened by expenses incurred by a heavy user they share the property with.
Transparency. When negotiating a triple net lease, be sure to request statements detailing several years’ worth of operating expenses for the building in question. Knowing what the expenses have been at the property will enable you to budget for utilities, insurance, common areas, etc. Be sure to ask about any upcoming, non-capital expenditures the landlord is planning to make. Capital expenses are the responsibility of the landlord and cannot be passed through to tenants. However, additional costs for maintenance items, such as deep cleaning of common areas or resurfacing of parking lots, could be passed through.
Below market rents. If you carefully negotiate triple net lease terms, keep your daily operating expenses low and occupy a building that presents no surprise costs, you may be able to pay below market rents compared to a user that has entered into a full-service lease for a comparable property.
What Are the Tenant Risks of a Triple Net Lease?
Direct expenses. If utility costs rise or a tenant spends more than anticipated on direct expenditures, they will pay more than expected to occupy the space. With a full-service lease, the landlord that set expenses at a fixed figure will bear the risks should costs rise.
Property taxes, insurance premiums and common area maintenance charges are, for the most part, outside the control of the tenant. If any of these expenses increase because, for example, the building’s appraised value rose, an accident at the building caused premiums to increase or unexpected elevator repairs had to be made, the tenant could be on the hook for their portion of these expenses.