NNN, said out loud as triple net, means the tenant pays three categories of cost on top of base rent: property taxes, building insurance, and common area maintenance. The three Ns are those three items. The idea is that the rent reaches the landlord net of all of them.
The ladder the term sits on
- Gross lease. One number. The tenant pays rent, the landlord pays the operating costs out of it.
- Modified gross. The costs are split, and how they are split is written in the lease rather than implied by the name. This is the label that carries the least information.
- Single net (N). Tenant adds property taxes.
- Double net (NN). Tenant adds taxes and insurance.
- Triple net (NNN). Tenant adds taxes, insurance and maintenance.
What NNN usually does not include
This is where the term misleads most often. In an ordinary triple net lease the roof, foundation and structure stay with the landlord, and so, frequently, do capital replacements. A single-tenant building marketed as absolute NNN or bondable is the version where the tenant really does take everything, including the roof and the structure.
The two are quoted with the same three letters and are not the same investment. The lease decides it; the label does not.
The quoted rate is not the rate
A NNN rate is normally quoted as base rent by itself, with the estimated nets stated separately per square foot per year. So $24.00 NNN with $8.00 of nets is $32.00 all in, and a $30.00 gross quote next to it is the cheaper of the two.
Comparing a NNN quote against a gross quote without adding the nets back is the most common arithmetic error in a lease comparison, and it runs in the landlord's favour every time.
Two further things the quote does not tell you:
- Estimated nets are estimates. They are reconciled at year end, and the tenant pays the difference. A building with deferred maintenance or a pending reassessment can reconcile well above the quoted figure.
- CAM is defined by the lease, not by convention. Management fees, administrative loads, capital items amortised into CAM, and caps on controllable expenses are all negotiated. Two buildings quoting the same nets can bill very differently.
Why the structure moves the value, not just the cost
Under a triple net lease, rising taxes, insurance and maintenance are absorbed by the tenant. The landlord's net operating income is therefore steadier and more forecastable than the same headline income under a gross lease, and steadier income is capitalised at a lower rate.
That is the whole reason lease structure belongs in a valuation and not only in a budget: two buildings with identical rent rolls and different lease structures are not worth the same, and the difference is not small.
What to check before you trust a rent roll that says NNN
- Does the lease reserve roof and structure to the landlord? If yes, it is not absolute NNN however it was marketed.
- Is there a cap on controllable CAM, and does it compound?
- What is the base year or the stop, if the lease has one? A NNN lease with an expense stop behaves partly like a gross lease.
- When were the nets last reconciled, and what was the true-up?
- Does any tenant have an exclusion from a category the rest of the building pays?
Every one of those lives in a clause, which is why a lease abstract that cannot point at the clause it came from is not evidence of anything.