NNN lease structures (Triple Net Leases) are designed to transfer nearly all operational cost responsibilities from the landlord to the tenant. These leases are common in industrial and commercial real estate where long-term, cost-stable occupancy is prioritized. The tenant pays base rent plus all variable operating costs, ensuring predictable income for the landlord and accountability for property use by the tenant.
Here’s how NNN lease structures function to achieve full cost pass-through:
1. Property Tax Responsibility
- Tenant Obligation:
The tenant pays 100% of real estate taxes, including municipal, state, and special assessments related to the property. - Billing and Reconciliation:
Taxes are either paid directly by the tenant to the authorities or reimbursed to the landlord after submission of invoices. - Escalation Control:
Tenants bear the risk of property tax increases, ensuring landlords are shielded from tax-driven operating expense volatility.
2. Insurance Premium Coverage
- Tenant Obligation:
Tenants must carry liability, fire, casualty, and property insurance, naming the landlord as an additional insured. - Insurance Types:
Policies include general liability, content insurance, and industrial machinery coverage, often with landlord-specified minimums. - Risk Allocation:
This structure transfers the risk of property damage and liability to the tenant, reducing insurance costs and claims burden on the owner.
3. Maintenance and Repair Duties
- Tenant Obligation:
All costs related to facility maintenance, building systems (HVAC, electrical, plumbing), parking lots, landscaping, and roof repairs are borne by the tenant. - Scope:
Applies to both routine maintenance and capital improvements unless otherwise excluded or limited in the lease. - Service Standards:
Lease language often includes maintenance quality benchmarks, timelines, and inspection rights for the landlord.
4. Utilities and Operational Expenses
- Tenant Obligation:
Full responsibility for electricity, water, gas, sewer, waste disposal, security systems, and communication services. - Metering:
Facilities are often individually metered to simplify cost allocation; if not, tenants pay proportionate shared costs through CAM reconciliation. - Direct Pay Model:
Encourages tenant efficiency and conservation by tying utility usage directly to tenant accountability.
5. CAM (Common Area Maintenance) and Management Fees
- Tenant Obligation:
In multi-tenant settings, each tenant pays a pro-rata share of CAM costs, which include security, shared driveway upkeep, landscaping, snow removal, and management overhead. - Administration:
CAM expenses are pre-budgeted annually and reconciled at year-end based on actual expenditures. - Transparency:
Landlords often provide detailed CAM statements, with audit rights for tenants to verify charges.
