Pros and Cons of a Triple Net Lease for Tenants

In a commercial property transaction, the type of lease you sign matters just as much as the location, building quality, and base rent – if not more. For tenants, triple net leases can be attractive because they come with a lower base rent. However, they also come with other costs, such as taxes, insurance, and maintenance. NNN leases offer more control over the lease term and sometimes an overall lower cost, but they also mean less predictability.

A triple net lease isn’t “good” or “bad” compared to a gross lease or other lease types. For commercial tenants, the right option depends on your business model, risk tolerance, cash flow, space needs, and how much financial responsibility you want to take on for the property’s operating costs. Before signing a lease, it’s important to know the specific differences between each lease type, as well as fine print details you should ask about that can significantly affect your overall costs over the course of a lease. 

What Is a Triple Net Lease?

A triple net lease is a type of commercial lease agreement in which the tenant pays base rent plus property-related operating costs. These additional costs typically include property taxes, insurance, and maintenance – overarching categories that can encompass a number of different costs. The costs associated with a specific property can vary quite a bit from one lease to another, which means that it’s incredibly important for tenants to thoroughly review the actual lease language in an agreement. 

Unlike a gross lease, in which the tenant pays a flat monthly rate, a triple net lease is designed to pass more operating expense responsibility from the landlord to the tenant. While this structure can seem simple on the surface, tenants have to understand that the total monthly cost of leasing a building can be significantly more than the quoted rent once pass-through expenses are added. 

Triple Net (NNN) Lease Cost Breakdown

Let’s take a closer look at the actual costs that are associated with a triple-net lease structure.

• Property taxes. For NNN properties, tenants are responsible for their share of the property taxes, which are paid on a pro-rata basis. This means that tenants pay a percentage of the tax bill based on the portion of the building they lease. Keep in mind that property tax rates are set by the market and can fluctuate without notice.
• Building insurance. Like property taxes, building or property insurance premiums are billed to tenants at a pro-rata rate, based on the portion of the building leased.
• Maintenance and repairs. Tenants pay for regular maintenance of the building. This is often referred to as CAM charges, or common area maintenance charges. Maintenance costs can span a number of categories including landscaping fees, parking lot upkeep, lighting, trash services, shared-area maintenance, repairs, and other routine maintenance duties. Because CAM fees can vary greatly, it’s really important to know what exactly is included in this category in terms of your specific lease.
• Utilities. In a triple net lease structure, tenants are responsible for utilities, such as water, sewer, gas, and electric. Usually, buildings using a triple net structure will have individual metering, but not always. 
• Base rent. In addition to operating expenses, of course, tenants still pay base rent. Base rent is typically quoted on an annual, per-square-foot basis. 

In most cases, a triple net lease does not include the cost of major capital improvements. Landlords typically handle long-term structural replacements such as roofs, HVAC systems, or other problems like bad foundations. It’s highly important to understand the fine print in a lease agreement to make sure you know whether these types of improvements are included in your costs, as this detail can have a significant impact over time. 

Triple Net Lease Vs. Other Lease Types

When it comes to commercial real estate leases, triple net is especially common in industrial and retail spaces. Other lease types you might see often include gross (or full-service) leases as well as other types of net leases. 

Types of Net Leases – Single, Double, and Triple

• Single Net Lease. In this type of lease, the tenant pays a fixed rent plus property taxes. As far as net leases go, this type of structure gives the least amount of financial variability to the tenant. 
• Double Net Lease. In a double net lease, tenants pay for base rent as well as property taxes and insurance fees.
• Triple Net Lease. A triple net lease encompasses base rent plus the “three nets” – property taxes, insurance, and maintenance.

Net Leases Vs. Gross Leases

In a net lease structure, the tenant handles the variable costs of taxes, insurance, and maintenance, while in a gross lease/full-service lease, the tenant pays one consistent monthly rate. This rate bundles the additional costs into the rent, so that the tenant has a fixed lease fee every month. 

Because a gross lease bundles more costs into the rent, it makes budgeting easier and can be an excellent option for startups, those with a fixed income, or any other businesses who need a stable budget – even though it means higher rent. 

On the other hand, a NNN lease structure provides more transparency and gives a high level of direct control over the month-to-month costs of a building. The downside is that costs can vary significantly over time. 

Other Lease Types

Other types of commercial leases you might encounter include:

• Modified Gross Lease. This is a hybrid method in which the tenant pays base rent plus a portion of the operating expenses, or possibly assumes more responsibility over time.
• Absolute Net Lease (Absolute NNN). In this model, the tenant takes on all possible costs of the building, including major structural repairs.
• Percentage Lease. A more common option for retail space, this approach allows a tenant to pay base rent plus a percentage of their monthly gross sales.

Pros and Cons of a Triple Net Lease for Tenants

Let’s take a closer look at the pros and cons of a triple net lease from a tenant’s perspective. Keep in mind that a NNN lease can be ideal for some tenants and suboptimal for others based on factors such as the business model, space needs, and tolerance for cost variability. 

Pros of a Triple Net Lease

• Lower base rent. Since operating costs are passed through, tenants enjoy lower rents in NNN leases. 
• More transparency. Tenants know exactly where funds are going.
• More control. Tenants have greater control when it comes to managing costs such as utilities, and they can sometimes choose their own vendors for maintenance and repairs. 
• Longer-term occupancy. NNN leases are often 10-20-year structures and can provide long term stability for established businesses.
• Tax deductions. It’s common for tenants to be able to deduct certain costs (such as property taxes, insurance, and maintenance) as tax expenses in a NNN lease. 
• Potential lower costs. Tenants take a risk in a NNN lease, but in some cases, overall costs may be lower than the set fee of a gross lease. 

Cons of a Triple Net Lease

• Less predictable costs. Because taxes and insurance are set by market conditions, they can rise without notice. Tenants must be able to cover variable expenses.
• More responsibility. Tenants may have to oversee maintenance and cover unexpected expenses. 
• Budgeting challenges. Variable costs can be tricky for businesses with tighter margins and can create higher risk.
• Financial risk. Tenants are responsible for additional costs that occur due to property damage. 
• Lack of clarity. In a triple net lease, it’s highly important to carefully assess the fine print of the agreement. Small wording differences in a lease can have major financial consequences over time.

Is a Triple Net Lease Good for Tenants?

There’s no right or wrong answer. A triple net (NNN) lease can lower base rent, but it also shifts more operating risk to the tenant.

A triple net lease can be a good option if you want greater control, more cost transparency, long-term occupancy, a specific location, and the company can handle some variable expense risk.

A triple net lease may NOT be good if you need predictable, steady expenses – rising taxes, insurance, and repair costs can make budgeting harder to forecast.

The “right” lease is the one that fits YOUR company’s cash flow and long-term space strategy.

If you’re not sure whether a triple net lease is the best option, look for a commercial broker who takes the time to understand your specific situation and can help you determine the best lease structure for you, while also considering market details specific to your location. 

What Tenants Should Ask Before Signing a NNN Lease (The Fine Print)

Small details in your lease contract can impact your overall costs by thousands over the course of the lease. Working with an experienced commercial realtor is the best way to ensure that you don’t miss any potentially jeopardizing details in the lease agreement. Before signing a triple net lease for commercial space, be sure to ask about the following:

• What expenses are included in CAM? Are management fees part of the charge?
• How are taxes, insurance, and maintenance calculated and allocated?
• Are there caps on annual increases or controllable expenses (such as landscaping and management fees)?
• Who’s responsible for roof, HVAC, parking lot, structural repairs, and other capital expenses?
• How are utilities billed?
• Are reconciliations done annually? How are overages or underpayments handled?
• Is there a gross-up provision? (This prevents you from paying more if there’s low occupancy in the building.)

Why Work With a Local Broker?

Lease norms can vary from one area to another. The metro Charlotte commercial market has a wide range of industrial, office, and retail submarkets, with some properties using net lease agreements and others using different lease structures. A local advisor is your best defense against hidden lease clauses, missed fine print, unseen structural issues, and overpriced properties. From reviewing pass-through expenses to understanding CAM language and landlord-friendly clauses, a local broker who has plenty of experience can help you negotiate or walk away from a property that will end up costing more than it’s worth. 

At Regent Commercial Real Estate, we make it a priority to take into account each client’s specific needs, helping you narrow your search and understand the numbers without overcomplicating the process. We know that each business is unique, and we want to make sure you get not just the property that works for you, but also the lease structure that will best allow your company to thrive. 

With over 10 years of experience in the greater Charlotte, NC area and nearly 1000 successful sales and lease transactions completed, we understand the ins and outs of both different lease structures and the unique benefits that Charlotte’s neighborhoods offer. 

Whether you’re still trying to decide if a triple net lease is best for you or you’re ready to start touring commercial properties, our team is here to help. Contact us today at 704-910-9518 or by emailing brian@regentcre.com.