Triple Net Leases Explained: What Every Commercial Landlord Should Know

What Is a Triple Net Lease?

A triple net lease (NNN) is a lease structure where the tenant pays base rent plus three categories of property expenses:

1. **Property Taxes** (the first "N")
**Insurance** (the second "N")
**Common Area Maintenance/Operating Costs** (the third "N")

In a true NNN lease, the landlord's responsibility is limited to structural elements (roof, foundation, exterior walls). The tenant handles virtually everything else.

The Lease Type Spectrum

Commercial leases exist on a spectrum from landlord-responsible to tenant-responsible:

Gross Lease (Full Service)

Tenant Pays: One flat rental rate Landlord Pays: All operating expenses

Common in: Multi-tenant office buildings

**Pros for Landlord:**
Can charge premium for convenience
Control over property management
Simpler tenant relationships

**Cons for Landlord:**
Expense risk (rising costs reduce returns)
More management responsibility
Operating expense increases reduce NOI

Modified Gross Lease

Tenant Pays: Base rent + some operating expenses Landlord Pays: Remaining operating expenses

Common in: Office buildings, some retail

**Typical Structure:**
Landlord pays base year expenses
Tenant pays increases above base year
Specific expenses negotiated

Triple Net Lease (NNN)

Tenant Pays: Base rent + property taxes + insurance + CAM Landlord Pays: Structural items only (roof, structure, parking lot)

Common in: Retail (especially single-tenant), industrial

Absolute Net Lease (Bondable Net)

Tenant Pays: Everything, including structural repairs Landlord Pays: Nothing

Common in: Single-tenant corporate properties

The ultimate in passive income—and typically lower base rents to compensate.

Benefits of Triple Net Leases for Landlords

Predictable Income

With expenses passed to tenants, your NOI is essentially your rent collected. No surprises from rising property taxes or maintenance costs.

**Example:**
Base Rent: $100,000/year
In a gross lease, rising expenses reduce your NOI
In a NNN lease, your NOI stays $100,000 (minus structural reserves)

Reduced Management

Tenants handle day-to-day property operations:
Hiring contractors
Managing repairs
Dealing with service providers
Handling insurance claims

Your involvement is limited to major structural issues and lease administration.

Expense Protection

Property taxes can increase significantly. Insurance costs have risen substantially. CAM costs inflate over time.

In a NNN lease, these increases pass to the tenant. Your returns are protected from expense inflation.

Tenant Investment

When tenants pay for maintenance and repairs, they're incentivized to:
Maintain the property well
Make improvements at their cost
Address issues before they become major

Attractive to Investors

NNN properties command premium pricing because:
Income is more predictable
Management is minimal
Cash flow is more bondable
Financing is often easier

The Math Behind NNN vs. Gross Leases

Let's compare equivalent deals:

**Gross Lease:**
Rent: $30/sq ft
Operating Expenses: $12/sq ft (paid by landlord)
Landlord NOI: $18/sq ft

**Triple Net Lease:**
Base Rent: $18/sq ft
Operating Expenses: $12/sq ft (paid by tenant)
Landlord NOI: $18/sq ft

Same NOI—but different risk profiles.

**If expenses rise to $14/sq ft:**
Gross Lease NOI: $16/sq ft (landlord absorbs increase)
NNN Lease NOI: $18/sq ft (tenant absorbs increase)

Over a 10-year lease, this expense protection can be worth hundreds of thousands of dollars.

How NNN Expense Recovery Works

Estimating Annual Expenses

At lease commencement, estimate annual operating expenses:
Property taxes (known)
Insurance (known)
CAM (estimated based on history)

Collecting Monthly Estimates

Collect 1/12 of estimated annual expenses monthly with base rent:
Base Rent: $10,000/month
Property Tax Estimate: $2,500/month
Insurance Estimate: $500/month
CAM Estimate: $1,500/month
Total Monthly: $14,500/month

Year-End Reconciliation

At year-end, compare actual expenses to estimates:
If actuals exceed estimates: tenant pays the difference
If estimates exceed actuals: landlord credits or refunds tenant

Documentation Requirements

Maintain detailed records:
All expense invoices
Annual expense statements
Reconciliation calculations
Supporting documentation for audits

Most leases give tenants audit rights—proper documentation protects you.

Key NNN Lease Provisions

CAM Definitions

Define exactly what's included in CAM:
Landscaping and snow removal
Parking lot maintenance
Common area utilities
Property management fees
Security
Common area repairs

**Exclusions typically negotiated:**
Capital expenditures (or amortize over useful life)
Landlord's income taxes
Leasing commissions
Costs covered by insurance

Administrative Fees

Standard to add 10-15% administrative fee to CAM charges to cover:
Accounting and record-keeping
Property management oversight
Audit response costs

Expense Caps

Tenants often negotiate CAM caps:
**Cumulative caps:** CAM can't exceed base year by more than X%
**Annual caps:** Year-over-year increases limited to X%
**Controllable expense caps:** Excludes taxes and insurance

Caps shift expense risk back to landlord—negotiate carefully.

Year-End Timing

Specify when reconciliation occurs and when adjustments are due:
Landlord provides statement within 90 days of year-end
Tenant payment due within 30 days
Tenant audit rights expire after 12 months

NNN Lease Risks and Considerations

Tenant Credit Quality Matters More

In a NNN lease, you're counting on the tenant to pay everything. Tenant default is catastrophic because:
You lose rent
You inherit unpaid taxes and insurance
Deferred maintenance surfaces
Property may be neglected

Screen tenants rigorously for NNN deals.

Structural Responsibility

You retain responsibility for:
Roof and roof structure
Foundation
Exterior walls (structural)
Parking lot (often major cost)
Building systems in some leases (HVAC, plumbing, electrical)

Reserve for these costs—they're significant and infrequent.

Lease Administration

NNN leases require active administration:
Accurate expense tracking
Timely reconciliation statements
Proper documentation
Audit response capability

Consider professional property management if you have multiple NNN properties.

Market Comparability

When analyzing NNN rents, ensure you're comparing apples to apples:
What expenses are included/excluded?
What's the base year?
Are there caps?
Who handles what structural items?

Single-Tenant vs. Multi-Tenant NNN

Single-Tenant NNN

One tenant responsible for entire property.

**Advantages:**
Simplest administration
True passive income
No CAM allocation complexity
Clear responsibility

**Risks:**
100% vacancy if tenant leaves
Credit risk concentrated
Limited diversification

Multi-Tenant NNN

Multiple tenants share expenses proportionally.

**Advantages:**
Diversified tenant base
No single-tenant concentration
Often higher total rent

**Challenges:**
Complex CAM allocation
Vacancy affects remaining tenants
More administration required

Is NNN Right for Your Property?

NNN structures work best for:
Retail properties (especially single-tenant)
Industrial properties
Properties with creditworthy tenants
Landlords seeking passive income
Properties where tenants want control

Gross or modified gross may be better for:
Multi-tenant office buildings
Properties with frequent turnover
Situations requiring landlord control
Tenants who prefer simplicity

Structuring Your Next Lease

Whether you're negotiating a new lease or renewal, understanding NNN structures helps you:
Set appropriate base rents
Define expense responsibilities clearly
Protect yourself from expense inflation
Create predictable income streams
Attract quality tenants who value clarity

Need help structuring your commercial lease? We specialize in helping GTA landlords maximize returns through proper lease structuring.

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