Tripe Net (NNN) Rent Explained

Triple Net (NNN) Lease Explained

What is triple net rent or N-N-N? Triple net rent, or N-N-N rent, is a type of commercial lease agreement

where the tenant is responsible for paying all the operating expenses of the property in addition to the

Base Rent. The operating expenses include property taxes, insurance premiums, and maintenance fees.

This means that the tenant is responsible for all the costs associated with the property’s operation and

upkeep, and the landlord is only responsible for the structural components of the building. Triple net

rent agreements are commonly used in commercial real estate leasing situations where landlords want

to pass the property’s expenses on to tenants without having to manage those expenses themselves.

What is Base rent? Base Rent in a triple net lease refers to the fixed amount of rent that the tenant pays

to the landlord for the use of the property. It does not include any additional costs related to property

insurance, property taxes, or maintenance expenses, which are typically paid by the tenant as additional

expenses in addition to the Base Rent. The Base Rent amount is usually determined at the start of the

lease and may increase over time based on the terms of the lease agreement. The Base Rent is the

money that the landlord typically uses to pay the mortgage for a property or puts in its pocket.

What are operating expenses, pass-through expenses, or ‘nets’ in a triple net (N-N-N) lease?

Net #1 – Property Taxes.

Property taxes are a type of tax that is levied on the value of real estate by the

local government. The property tax portion of a triple net lease is typically calculated based on the

assessed value of the property and the local tax rate. The tenant is responsible for paying their portion

of the property taxes directly to the local government agency.

Overall, property taxes are an important consideration when it comes to triple net lease agreements, as

they can significantly impact the overall cost of the lease for the tenant. It is crucial for both landlords

and tenants to have a clear understanding of how property taxes are calculated and how they affect the

lease agreement.

Net #2 – Property Insurance.

Property insurance is a type of insurance that provides coverage for

damages or losses to a property caused by specific perils such as fire, theft, vandalism, or natural

disasters. Under a triple net lease, the tenant is typically responsible for paying for expenses related to

the property, including property insurance. This means that the tenant would be required to maintain

property insurance for the duration of the lease. The specific policy required will vary depending on the

lease agreement, but property insurance can provide financial protection for both the landlord and the

tenant in case of damage or loss to the property. For example, if a fire damages the building, property

insurance would provide coverage for repairs or replacement. Overall, property insurance is an

important part of triple net lease agreements, as it helps mitigate the risk of financial loss due to

unforeseen events that could damage the property.

Net #3 – Maintenance or CAM.

CAM, or Common Area Maintenance, refers to the expenses related to

the operation and maintenance of common areas in a commercial property. Examples of common areas

include hallways, parking lots, elevators, and lobbies. These expenses may include landscaping, parking

lot maintenance, cleaning, utilities, and other repair costs. The expenses are typically shared by all

tenants in the property and are often calculated based on the tenant’s pro-rata share of the property’s

total square footage. In this type of lease, the tenant bears the risk of any unexpected expenses or

repairs. CAM charges are often passed along to the tenant as additional expenses, also known as pass-

through expenses, that they are responsible for paying in addition to their base rent and other triple net

expenses. CAM expenses can significantly increase the tenant's overall rent, and it is essential to

carefully review and understand the lease agreement before signing.

Operating expenses, pass-through expenses, and triple-net (N-N-N) expenses are generally referring to

the same thing. These expenses typically change annually, from year to year, while the Base Rent

usually follows the schedule outlined in the lease agreement.

So, for example, if you are a retail tenant, who is looking at a 1,500 square foot lease space, and the rent

quoted to you is $35 per square foot, plus NNN (estimated at $7.45 per square foot). The math for the

monthly rent would look at follows:

$35.00 + $7.45 = $42.45/SF*1,500 SF= $63,675 annual rent/12 months = $5,306.25/month.

What is a triple-net (N-N-N) reconciliation?

A triple-net reconciliation is the process of reconciling the payments made by the tenant for the

operating expenses against the actual costs incurred by the landlord. These reconciliations are typically

done in the first few months of the following calendar year. The reconciliation ensures that the tenant is

paying their fair share of the expenses and the landlord is receiving the correct amount of revenue from

the property. The triple net expenses are estimates. If the tenant overpays, there is typically a refund

or credit due to the tenant. If the tenant underpays, the tenant will have a specified time to pay the

outstanding balance to the landlord.

In conclusion, understanding how rent is calculated is paramount for tenants when going through the

commercial lease process. It is important that tenants work with a broker who understands these

concepts and calculations in order to have an accurate understanding of annual rent. Without this

understanding, the tenant can be caught off guard by the reconciliation process and owe large sums to

the landlord. It’s also important to understand that the triple-net expenses are estimates, which are

usually made by a property manager or owner. Good estimates are critical so that tenants aren’t hit

with large expense overages during the reconciliation process in the following year.

Triple Net (NNN) Lease FAQs

1. What is a triple net (NNN) lease in commercial real estate?

A triple net (NNN) lease is a commercial lease where the tenant pays base rent plus three operating expense categories: property taxes, property insurance, and maintenance (often called CAM). This lease structure shifts most expense risk from the landlord to the tenant.

2. What expenses does a tenant pay in an NNN lease?

In a typical NNN lease, the tenant pays property taxes, property insurance, and maintenance costs in addition to base rent. In multi-tenant properties, these expenses are usually shared proportionally based on the tenant’s square footage.

3. What is the difference between a gross lease and a triple net lease?

In a gross lease, the landlord usually pays most operating expenses and builds them into the rent. In a triple net lease, the tenant pays those expenses separately, which lowers base rent but exposes the tenant to changing costs over time.

4. Why do landlords prefer triple net leases?

Landlords prefer triple net leases because they reduce financial risk from rising expenses, simplify property operations, and stabilize net operating income. Stable net income typically improves property value and makes the asset easier to finance or sell.

5. Why don’t landlords offer gross leases on long-term commercial leases?

Landlords avoid long-term gross leases because expenses like property taxes and insurance can increase dramatically over time. If rent increases do not keep pace with expense growth, the landlord’s profit can shrink or disappear during the lease term.

6. What NNN costs increase the most over time?

The two NNN expenses that tend to rise the most are property taxes and insurance premiums. Taxes can jump after reassessments, and insurance costs have increased nationwide due to higher replacement costs and climate-related risk.

7. Why are property taxes such a major issue in Texas triple net leases?

Texas relies heavily on property taxes, and reassessments can happen frequently. When property values rise or a building sells, taxes can increase sharply, which directly increases NNN charges passed through to tenants.

8. What is NNN reconciliation in a commercial lease?

NNN reconciliation is the annual process of comparing estimated operating expenses paid during the year to actual expenses. If a tenant paid too little, they owe the difference. If they paid too much, they receive a credit or refund.

For a deeper tenant-focused breakdown, see our full NNN Lease FAQ for Austin, Texas.