Triple Net Lease (NNN): A Complete Guide

Leasing commercial property can be complicated and confusing. One term that commonly comes up is "Triple Net Lease," "NNN," "net-net-net lease" or "absolute-net lease." This is a common lease type for single-tenant properties, but may also come up for units in retail spaces such as strip malls. It's important for businesses to understand what they are getting into if they sign a triple net lease.

What is a Triple Net Lease?

A triple net lease is, essentially, a lease in which you take on all expenses of the property. And yes, there are single and double net leases too. A single net lease includes property taxes, a double net lease includes taxes and insurance. A triple net lease also includes maintenance. This means that in exchange for a lower lease fee, you take on all of the expenses of the property.

An absolute net lease may go further, passing on every imaginable expense including major repairs. In a triple net lease, you are generally not on the hook for major incidents, while an absolute net lease may leave you paying rent on a building that is currently uninhabitable. In retail spaces, triple net leases mean you are also charged a percentage of common area maintenance (CAM), such as janitorial services, generally determined by square footage.

In other words, you should be very careful with absolute net leases, but triple net leases are often reasonable to sign. The opposite of a triple net lease is a gross lease, where the landlord covers all the expenses but for a much higher rent.

You will know what kind of lease you are signing when you are negotiating the letter of intent (LOI) as it will state your net rent and will detail the additional costs. 

What are the Advantages of a Triple Net Lease?

There are a number of advantages to signing a triple net lease:

1. The rent is often considerably lower. In many cases you will be paying lower-than-market rent.
2. Many landlords are more willing to do a longer lease on triple net, as many of the expenses that increase year by year become the responsibility of the tenant. Ten-year terms are not uncommon. This means you don't need to renegotiate with your landlord every year or two.
3. You often, especially in single-unit buildings, have more control over what you can do with the space you are renting. Especially if you have a longer term lease, it can feel much more like owning the property.

What are the Disadvantages of a Triple Net Lease?

Triple net leases tend to benefit landlords, and there are a number of disadvantages:

1. Property taxes may increase substantially each year, and you do not have the right to contest these increases as you are not the owner. Many landlords will not bother doing so as they are not responsible for the cost. It is worth pointing out that this can result in a nasty increase when somebody moves out.
2. Maintenance, repair, and utility costs may fluctuate substantially from month to month, making it harder to plan and budget.
3. In single-unit properties you will be responsible for hiring and managing, or contracting with, maintenance and cleaning personnel. Your landlord may require that you use certain approved vendors, who may be more expensive.
4. Older buildings that need more maintenance come with considerably higher costs.
5. When costs are pro rated there can be certain pitfalls which can result in a sudden increase in bills.

What Should Tenants Consider When Signing a Triple Net Lease?

As already mentioned, triple net leases tend to favor landlords. Because of this, tenants should be willing to negotiate, the ease of which can depend in part on the supply of suitable commercial space in your area. However, you should make sure that you avoid these pitfalls and in some cases it may be better to wait to open or relocate to avoid them.

Here are some potential pitfalls to look for or avoid:

1. Pro rating of costs based on occupied space. Make sure that costs are pro rated based on the actual space in the building, ideally including unfinished areas. If there are five units in a small strip mall and two of the stores go out of business, you don't want to be paying their share of the costs. Always look at the calculations and double check them yourself to ensure the percentages are correct. Many leases state that if the building is 95% occupied, it will be treated as if it is 100% occupied.  That means if your building is full and a tenant who occupies 5% of the building moves out, your operating costs actually increase.  This is a negotiable item and if caught, some landlords will agree to remove the clause.
2. No wear-and-tear provision. Avoid signing a lease that does not contain a reasonable wear-and-tear provision so that you are not billed when you move out (this goes for most leases). Make sure you know what the wear-and-tear provision covers. Landlords expect the property to be returned in more or less the condition you leased it in, but normal aging does and should apply.
3. If your landlord requires you to contract with certain maintenance or janitorial companies, do independent research to make sure those companies are reputable and competent, and not considerably more expensive than their competition. Although you should not cheap out on maintenance. The same goes for required insurance. If your landlord is paying for the insurance and passing on the expense, then you are probably stuck with the company they choose, but you may be able to point out a better option if you know of one.
4. Find out whether maintenance expenses are charged as an average or as they occur. Then look at maintenance costs and see which seems to be more favorable to you.
5. Try to get caps or limits on operating expense pass-throughs your landlord can control. For larger buildings this generally means maintenance and repair. Having a limit above which your landlord becomes responsible encourages your landlord to be reasonable when paying for common area work.
6. Be aware that you have a right to audit any expense calculations outlined in the lease agreement to keep your landlord honest. If in a multi-tenant building, it is worth working with other tenants and comparing your expenses to ensure they are reasonable.

Although NNN leases are generally less favorable, in many areas they are the only option and your best route is to negotiate the best lease you can within the net-net-net lease framework.

Remember that you can always at least try to negotiate with your landlord, and that you should work with them in a non-confrontational manner.

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