Real Estate Basics: What Is Triple-Net?

A small business owner leasing a retail space for the first time can come across several foreign terms used in the commercial real estate industry along the way. Aaron Petree, Loeb’s VP Brokerage, is here to unpack a commonly-used term pertaining to retail rental rates: the “Triple Net” charge, or NNN.

Here’s the question: I’m looking for retail space and I don’t understand the lease rates. They’ll say $10.00 per square foot, for example. I see NNN after the psf sometimes, what’s that all about?

NNN = triple net lease.  This means that in addition to base rent (which is usually quoted as per square foot per year), the tenant will also pay his/her prorata share of the property’s real estate taxes, insurance, and common area maintenance expenses.  

For example, if the building consists of ten 1,000 sf spaces, each tenant would be responsible for 1/10 (or 10%) of the property’s real estate taxes, insurance on the building, and common area maintenance (also referred to as “CAM”–landscaping, parking lot cleaning, lighting maintenance, trash pickup, security, management fees, etc.).  These three categories (taxes, insurance, and CAM) correspond to the “triple” in triple net, or NNN.

This % is calculated using a fraction whose numerator is the tenant’s square footage , in this case 1,000 sf, with the total building square footage as the denominator, 10,000 sf in this example.  Because it is calculated this way, a tenant’s % share remains the same regardless of how many vacant spaces there are in a building. Or, in other words, existing tenants don’t have to pay vacant spaces’ share.

This extra charge is usually in the form of a monthly payment based on the property manager’s annual budget for these items.  Then, at the end of the year, the actual amounts are reconciled against what the tenant paid in (since these payments were based on an estimated budget).  If the actual amount ends up being more than what was estimated, the tenant owes the difference.  If it ends up being less, the tenant is refunded the difference.  If there is a large difference one way or another, or if the budget for the upcoming year predicts a significant change in these expenses, the tenant’s estimated payments may be revised to reflect the anticipated change, to avoid a large shortage or surplus at next year’s reconciliation.

Once the lump sum for the yearly expenses is projected, it’s divided by the number of square feet; then it can be quoted on a per-square-footage basis alongside the base rent, quoted as a per-square-footage-per-year basis.