The Pros & Cons of Triple Net Leases: What You Should Consider

Note from Fowler Property Advisors:
We get a lot of questions about the types of commercial real estate leases out there. What are the types of commercial leases? Which one is best? What should be included? As a result, we’ve decided to do a series of blog posts to help answer these questions, starting with an overview of the common lease structures. This look at Triple Net leases is the second in our series.

Offered most often in retail and industrial transactions, triple net (NNN) leases are a common type of commercial real estate lease agreement in which the tenant agrees to pay for taxes, insurance, and common area maintenance (TICAM) expenses in addition to their base rent. This type of lease shifts many of the costs associated with owning and maintaining a property from the landlord to the tenant, making it a popular choice for commercial property owners.

Understanding Triple Net Leases
Depending on the structure, tenant expenses and repair/maintenance obligations can vary. These expenses and obligations can include property taxes, insurance premiums, and common area maintenance costs such as landscaping, snow/ice removal, and repairs to shared spaces like parking lots and lobbies.

Common structures for this type of lease include standard triple net, absolute triple net, and a triple net ground lease. It’s also good to point out that, in general, triple net lease, absolute triple net, and ground lease broadly represent the spectrum of tenant responsibility (from least to most).

  • In a standard triple net lease, the tenant pays a base rent, some or all of the property taxes and insurance (on top of their own business taxes and insurance), property management fees, utilities, janitorial services, and common area maintenance expenses (costs such as sewer, water, trash collection, landscaping, parking lots, fire sprinklers, and any other services shared with other tenants). In cases where there is a lobby attendant as well, the tenant also pays his or her wages as part of the NNN fees. It is important for tenants to be aware prior to signing a lease that these expenses vary year to year and that they will be charged based on actuals. We go into more detail about reconciliation below.

  • An absolute triple net lease is similar to a standard triple net lease, but it’s also less common. In this lease type, the tenant is typically responsible for the repairs to the building structure in addition to the standard property expenses i.e., taxes, insurance, and common area maintenance.

  • A triple net ground lease typically adds even more responsibilities for the tenant in the form of insurance and repairs but also gives the tenant additional flexibility and control concerning improvement to the land.

Benefits for Tenants

  • Flexibility in Space Customizations
    Tenants often have more freedom to customize and maintain their leased space to meet their specific needs and preferences.

  • Potential Tax Deductions
    Depending on local tax laws, tenants may be able to deduct their portion of property taxes and insurance premiums as business expenses.

Tenant Risks and Considerations

  • Variable Expenses
    Since tenants are responsible for paying property expenses, they may face fluctuating costs over the lease term, particularly if property taxes or insurance premiums increase.

    For example, if the leased property is part of a shopping center of development, TICAM (taxes, insurance, common area maintenance) will likely be shared by the tenants. In this case, the tenant commonly pays an estimated TICAM amount monthly but is subject to an annual reconciliation of expenses by the landlord. In the event the estimated payments are lower than the actual amounts, the tenant will owe a lump-sum amount to the landlord. This can be an ugly surprise for tenants’ budgets.

    Additionally, when tax revaluations and insurance assessments come due, any increases are passed along to tenants. Case in point: When Mecklenburg County underwent tax revaluations in March 2023, the average property assessment increase was 51%. Similarly, insurance companies are asking now for a 42% increase statewide in NC. These are not expenses landlords are going to “eat”; they’ll be passed along to tenants via TICAM provisions in their leases.

  • Lease Structure
    Triple net leases can vary, and tenants should carefully review the terms and provisions to ensure they understand their obligations and liabilities.

  • Property Condition
    Tenants should conduct thorough due diligence to assess the condition of the property and any potential maintenance or repair issues that could arise during the lease term.

Overall, triple net leases offer both landlords and tenants unique advantages and considerations. No matter which side of the transaction you’re on, when you’re ready to find the ideal spot for your business, it’s imperative to work with a commercial real estate advisor who will have your back and work for the best deal for you, whether leasing or buying. We have this experience and client-centered focus. Call us at 704.219.0908, email, or schedule an appointment using the button below.

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