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  • Writer's pictureJustin Sterling

NNN 101

Ever hear the term "Triple Net" or see NNN and not know what that means? Before you keep reading, STOP and imagine that when you pay a Landlord you do so with a bucket money, and that bucket represents the "Total Rent". If that bucked had 4 layers to it, and each layer described how the the the property used those dollars it would look like this:

  • Base Rent

  • Common Area Maintenance (CAM)

  • Property Tax

  • Property Insurance

"Triple Net" (NNN), is industry slang that means that your "Total Rent" is itemized. The delineation creates transparency and accountability between the Landlord and Tenant The triple net (NNN) portion is common area maintenance, property tax and the property insurance. The NNN is sometimes referred to as "Pass Thru" charges. This is because CAM, Taxes, and property insurance are first paid by Landlord and the cost is then passed thru to the Tenants. The NNN costs are estimated, and they are calculated annually, and correspond to the size of space each Tenant occupies within the center.

  • NNN line items fluctuate up and down from one year to the next. A Landlord will estimate the current year NNN from the previous years NNN expenses. Those cost are reconciled at the end of each year. Sometimes a Tenant gets a refund or credit if those cost decreased from the previous year, or they may also get a bill for the difference if those cost increased.

  • An extreme example may be a year with abnormal snowfall, or a drought. These weather events may increase the cost of maintaining the parking lot or landscaping etc and these cost will pass thru as "additional rent" to the Tenant.

You find a 1,400 SF retail space. How much is rent? They answer $2,160 per month,

Now assume you found a similar space, but the answer is $18.52 per square foot ( PSF)

Which one is more expensive? Neither. It's the same price.

  • $2,160 x 12 = $25,920 per year

  • $25,920/ 1,400 SF = $18.52 per square foot ( PSF) per year.

"$18.52 PSF Gross" is the total bucket with no information about how the money is spent. Let's imagine that 1,400 retail space is presented to you as $15.00 + $3.52 NNN (estimated). Is this NNN lease more or less expensive than a gross lease?

  • 15.00+3.52 = 18.52

  • 18.52 x 1,400 = $25,920

  • 25,920 /12 = $2,160 per month (estimated)

Landlords of every stripe are real estate investors. Do you think they are paying to maintain a property, pay taxes and insure it then failing to pass those cost on to the Tenants? If they were not passing those costs thru they will go bankrupt. Having a gross lease does not mean you are "saving money", it just means you are not privy to the landlords expenses.

When you cou call an agent, or speak with a landlord and are presented with the "rent", It's likely you are provided with an estimate NOT A QUOTE. That estimate is subject to change. Securing a lease is a process, not an event. There are many variables and stakeholders which all have expectations that need to be remedied and as information becomes available during the process, the idea is that the unknowns become known. The process may reveal problems and hopefully solutions where the final negotiated price works for everyone. Property tax, material cost, and labor cost are always in flux. So it's not hard to imagine why a Landlord or a Tenant is reluctant to commit to a specific price until they are both ready to execute the lease. A NNN lease offers a more precise understanding of the economics of a Lease, and all parties have some ability to account for changing circumstances throughout the Lease negotiation and over the Lease term. A gross lease can be much simpler concept to grasp, but don't let the NNN lease structure be a reason for saying no to a good opportunity.

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