Understanding The Triple Net Lease

by Lisa Brennan

When you have finally found the perfect commercial space for your business, the next step—lease negotiation—will be critical to your business for years to come. This process can be daunting. It can include several unfamiliar terms (that you will quickly become too familiar with!). One key term that frequently comes up is the “triple net lease.” This type of leasing structure is universal to most commercial real estate leases. Here, we’ll break down the basics of a triple net lease.

What is a Triple Net Lease?

A triple net lease, often abbreviated as NNN lease, is a type of lease agreement where the tenant is responsible for paying all the operating expenses associated with the property in addition to the base rent and basic utilities. The three “nets” in this lease structure refer to:

  1. Property Taxes
  2. Insurance
  3. Maintenance Costs (including common area maintenance fees or “CAM”)

This contrasts with most residential leases where the landlord might cover some or all of these expenses. In a residential lease, the tenant pays their monthly rent to the landlord and likely their own utilities. The tenant gets a phone number or email address to call for maintenance requests and at property tax time, the landlord pays the bill. But this is not the case in the commercial context.

              Triple net leases are common in shopping centers, standalone retail centers, office space and industrial and warehouse spaces.

Components of a Triple Net Lease

  1. Base Rent: The tenant pays a fixed amount of base rent to the landlord each month. The fixed amount may be based on the square footage of the premises or simply a flat rate, often increasing by a small percentage each year. This amount is typically lower because it does not include the triple net expenses discussed above.
  2. Property Taxes: In addition to rent, the tenant is also responsible for paying the property taxes assessed by the locality on the leased space. This can be a significant expense, depending on both the location and value of the property. In addition, in a space with multiple tenants, it becomes important to ensure that each tenant pays the portion attributable to their use of the premises only.
  3. Insurance: The tenant must also obtain their own insurance and cover the cost of insurance for the property. The landlord will often stipulate coverage requirements to include includes general liability insurance and sometimes additional coverage as well.
  4. Maintenance Costs: Tenant will typically be required to pay the costs for repairs and upkeep of the property. The tenant handles routine maintenance as well as major repairs, although some leases might specify exceptions or caps on these costs. The landlord often maintains responsibility for larger structural components, such as the roof or exteriors. This may also include a fee for “common area maintenance” or “CAM” charges. In a shopping center or space with multiple tenants, this typically covers features used by all tenants – security, parking lots, landscaping, snow removal, and administrative costs, for example.

Why Use a Triple Net Lease?

Triple net leases can be beneficial for both landlords and tenants for several reasons:

For Landlords:

  1. Predictable Income: Landlords receive a predictable base rent without worrying about fluctuating operating costs. This stability can be particularly attractive for investors and property owners seeking consistent cash flow.
  2. Lower Risk: Since tenants cover all operational expenses, landlords are less exposed to the financial risks associated with property ownership.
  3. Attractive to Investors: Triple net leases are often seen as a safer investment because they provide a steady income stream with reduced property management responsibilities for the landlord.

For Tenants:

  1. Control Over Property Expenses: Tenants have more control over how certain property expenses are managed and can potentially reduce costs through effective management and maintenance on their own. A tenant may be able to shop around for the most cost effective maintenance for example, and invest the difference into their business.
  2. Potentially Lower Base Rent: Base rents are typically lower in a triple net lease compared to gross leases, as tenants assume responsibility for additional expenses outside of the base rent.
  3. Long-Term Stability: Triple net leases often involve long-term agreements, which can provide business tenants with stability and predictability in their occupancy costs.

A triple net lease is the preferred leasing option of most landlords in the commercial real estate world. By shifting responsibility for property expenses from landlords to tenants, this lease structure can provide financial predictability and management simplicity for both parties.

If you’re considering entering into a triple net lease agreement, it’s crucial to thoroughly review and negotiate all lease terms and obligations. The attorneys of Way Law are here to help you every step of the way!