Landlord Guide to NNN Leases

Triple Net Lease: A Smart Approach for Investors

At Coastline Equity, we’ve spent over 50 years perfecting the art of property management. While we often discuss residential investments, we also have extensive experience managing commercial properties, including retail centers and office buildings. A key aspect of managing these commercial assets is navigating the complexities of triple net leases (NNNs).

What is a Triple Net Lease?

A triple net lease, often abbreviated as NNN, is a common structure in commercial real estate. Under this lease, tenants cover three primary expenses: property insurance, property taxes, and maintenance costs. Essentially, the tenant pays for everything except the mortgage, providing the landlord with a more hands-off investment experience.

How NNNs Work

In a triple net lease, tenants agree to pay a proportional share of the building’s common-area maintenance (CAM) costs, property taxes, and insurance. These expenses are calculated and integrated into the lease agreement through an amendment. Every month, tenants pay their base rent plus the estimated monthly NNN charge.

Calculating NNN Costs

NNN costs are estimated by projecting the total expenses for the upcoming year, dividing by the building’s total rentable square footage, and then dividing by 12 to get a monthly per-square-foot rate. Each tenant’s monthly NNN cost is determined by multiplying this rate by their occupied square footage.

While property taxes and insurance are relatively stable, CAM costs can fluctuate, especially with unexpected or one-time expenses. Because of this, tenants are informed that NNN charges are based on estimates, and actual costs may vary.

At the end of each year, a CAM reconciliation is conducted to compare estimated expenses with actual costs. If tenants overpaid, they receive a refund. If they underpaid, they cover the difference.

What Do NNNs Cover?

NNN expenses specifically cover the costs of maintaining common areas, benefiting all tenants. Routine expenses include services like property management, trash removal, and exterior lighting. Non-recurring expenses might involve repairs, like fixing potholes or replacing lighting fixtures.

In regions like Los Angeles, Riverside, and Orange County, NNN leases often specify that the landlord is responsible for structural elements such as the foundation, structural beams, and the roof.

Benefits of NNN Leases

NNN leases offer several advantages over traditional gross leases:

1. Lower Base Rent: Landlords can attract tenants with lower base rents since additional costs are covered by NNN charges, shared among all tenants.
2. Tenant Responsibility: Tenants are motivated to maintain common areas, reducing overall costs.
3. Long-Term Stability: NNN leases typically involve longer terms, providing stability for both landlords and tenants.
4. Investment Appeal: Banks and lenders view NNN leases as stable, which can lead to better loan terms. These leases are also attractive to potential buyers, simplifying property sales.

Why Choose Coastline Equity?

With decades of experience in managing commercial properties, Coastline Equity is your partner in optimizing property performance. Whether you’re renegotiating leases or planning CAM expenses, we bring expert guidance to every aspect of commercial property management.

For more insights on NNN leases or to discuss your property management needs, visit us at Coastline Equity.