What Does a Landlord Pay For in a Triple Net Lease?

Triple-net leases shift operating expense responsibility to tenants while landlord retains capital and financing obligations. Understanding the distinction between recoverable tenant-paid expenses and landlord-held capital items is fundamental to NNN underwriting.

#Net Lease Structures

Three net lease variations exist, differing in expense pass-through:

Single Net (N):
Tenant pays rent plus property taxes only.

Double Net (NN):
Tenant pays rent plus property taxes and insurance.

Triple Net (NNN):
Tenant pays rent plus property taxes, insurance, and maintenance (common area maintenance, or CAM).

Triple-net leases comprise approximately 78% of all commercial lease agreements. They're standard in retail and strip mall investing.

#Tenant-Paid Operating Expenses

In NNN leases, tenants pay pro-rata share of operating expenses through recoverable expense pass-throughs:

Property Taxes:
Assessed annually by county assessor. Tenants reimburse landlord pro-rata share. Property taxes typically constitute 20-30% of total operating expenses.

Insurance:
Property and liability coverage. Landlord procures master policy; tenants reimburse pro-rata share. Insurance costs range $0.20-$0.50 per sqft annually for strip malls.

Common Area Maintenance (CAM):
Parking lot, landscaping, trash removal, exterior cleaning, common area utilities, HVAC maintenance, lighting, security, snow removal, and roof/parking lot repairs.

CAM is typically estimated annually, collected monthly from tenants pro-rata, and reconciled year-end.

Utilities in common areas are generally 100% tenant responsibility in NNN leases.

#Landlord Financial Obligations

Despite "triple-net" terminology, landlords retain significant expense responsibilities:

Debt Service:
Mortgage payments on acquisition financing. This is entirely landlord obligation.

Structural and Capital Repairs:

• Roof replacement ($6-$12/sqft)


• Foundation work


• Exterior wall repair


• Major HVAC replacements


• Parking lot seal coating and re-striping (depending on lease)


• Code compliance upgrades

Landlords typically cover 5-10% of total maintenance costs in NNN leases when including capital items.

#Practical Expense Allocation Example

A property with $100,000 annual operating expenses allocates as follows:

• Property taxes: $25,000 (tenants pay pro-rata)
• Insurance: $15,000 (tenants pay pro-rata)
• CAM: $30,000 (tenants pay pro-rata)
• Roof reserve (landlord): $10,000/year (landlord only)
• HVAC reserve (landlord): $5,000/year (landlord only)
• Capital items (landlord): $15,000 (landlord only)

Tenants pay $70,000 ($25K + $15K + $30K).
Landlord pays $30,000 ($10K + $5K + $15K).

#Pro-Rata Expense Distribution

In multi-tenant properties, pro-rata shares are calculated on occupied square footage:

50,000 sqft property, 85% occupied (42,500 sqft leased)

• Tenant A: 5,000 sqft


• Pro-rata percentage: 5,000 ÷ 42,500 = 11.76%


• Tenant A CAM share: 11.76% × $30,000 = $3,528

Vacant spaces do not generate pro-rata recovery—landlord absorbs vacant CAM.

#Bottom Line

NNN leases allocate operating costs but not capital costs to tenants. Tenants pay property taxes, insurance, and routine CAM. Landlords cover structural repairs, capital replacements, debt service, and major equipment. Distinguish between recoverable tenant-paid expenses and non-recoverable landlord capital items in acquisition underwriting.