What Is a NNN Lease?

A triple net—or NNN—lease generally requires the tenant to pay three categories of property expenses in addition to base rent: real estate taxes, building insurance, and maintenance. Those are the three “nets.”

Essentially, the tenant pays the ongoing operating costs associated with the property they rent, or their share of those costs in a multi-tenant building. But that doesn’t automatically mean the tenant pays for everything. Responsibility for major repairs, replacements, and structural work depends on the lease.

An absolute NNN lease generally goes further, placing those responsibilities—including capital costs such as roof replacement—on the tenant. You’ll often encounter this arrangement in freestanding, single-tenant properties with long-term leases. Think of a Walgreens or Taco Bell location, although the actual lease still needs to be reviewed.

You may also hear a lease described as “modified NNN.” That usually means certain responsibilities have been adjusted between the landlord and tenant. The label alone won’t tell you what those adjustments are.

What is—and isn’t—included?

Whether a lease is described as NNN or modified NNN, ask what the charges cover. Electricity may be separately metered and paid directly by the tenant. Janitorial service may be included in building expenses, or tenants may arrange and pay for their own cleaning. Neither arrangement, by itself, determines the lease type.

Also ask who pays for HVAC repairs and replacement, roof work, and other major expenses. Routine maintenance and replacing an entire system can be very different obligations—and very different checks!

Tenant tip: You are much better off with a Gross Lease. In this case you know exactly how much rent you will be paying in the future without any offsets or overages.

How does “your share” work?

In a multi-tenant property, your proportionate share is usually based on your rentable square footage divided by the building’s total rentable square footage, as defined in the lease.

For example, if you lease 2,000 square feet in a 20,000-square-foot building, your share is 10%. If the annual expenses recoverable under your lease total $100,000, your portion would be $10,000.

Your lease should spell out that percentage, which expenses it applies to, and any exclusions or limits.

Why do landlords use NNN leases?

NNN leases allow landlords to recover agreed-upon property expenses from tenants, helping protect rental income as operating costs change. This can support consistent upkeep, but the quality of maintenance still depends on the owner and management.

For tenants, the advantage is greater visibility into the expenses they are paying. The tradeoff is that those expenses can fluctuate, so the base rent is only part of the occupancy budget.

What happens at year-end?

In many multi-tenant NNN leases, tenants pay monthly installments based on an estimated annual expense budget, often quoted as a dollar amount per square foot.

After year-end, the landlord reconciles actual recoverable expenses against the estimates paid, following the timing and procedures in the lease. If your payments fell short, you may receive an invoice. If you overpaid, you may receive a credit or refund, depending on the lease.

Landlord Tip: While it may be more cumbersome, your partners will appreciate a well established, good looking real estate investment with tenant reimbursements for all of those pesky maintenance costs!

Before signing, understand the complete cost of occupying the space: base rent, NNN charges, separately billed services, and your repair obligations. Three letters can describe the lease—but they can’t replace reading it.