Understanding Triple Net Leases: A Guide for Commercial Tenants and Landlords

A triple net lease (NNN lease) is a commercial lease structure where the tenant pays base rent plus their proportional share of three operating expenses: property taxes, building insurance, and common area maintenance (CAM). In Silicon Valley, NNN charges typically add $0.50 to $2.00+ per square foot per month on top of the base rent, a cost that can represent 15-30% of total occupancy expense.

What Is a Triple Net Lease?

A triple net lease transfers the variable operating costs of a commercial property from the landlord to the tenant. The “three nets” are:

1. Property Taxes (Net 1): The tenant pays their pro-rata share of property taxes. In California, Proposition 13 limits annual increases to 2%, but reassessment upon sale can cause significant tax jumps.
2. Insurance (Net 2): The tenant pays their share of the building’s property insurance premiums.
3. Common Area Maintenance / CAM (Net 3): The tenant pays their share of shared building costs, landscaping, parking lot maintenance, elevator service, lobby cleaning, roof repairs, HVAC system maintenance, and property management fees.

A tenant’s share is calculated based on the percentage of total leasable square footage they occupy.

How Do NNN Costs Break Down?

Example: A tenant leasing 3,000 SF at $3.00/SF/month base rent + $0.75/SF/month NNN pays a total of $3.75/SF/month, or $11,250/month total occupancy cost.

What Is the Difference Between NNN, Gross, and Modified Gross Leases?

What Are the Pros and Cons for Tenants?

Pros:

• Lower base rent: NNN leases typically offer lower base rent compared to gross leases because operating costs are separated.
• Cost transparency: Tenants see exactly what they are paying for each expense category.
• Control: In single-tenant NNN leases, tenants often manage their own maintenance, giving them control over vendor selection and service quality.

Cons:

• Expense variability: Property taxes can increase after reassessment, insurance premiums rise, and CAM charges fluctuate year to year.
• Hidden costs: Some landlords include capital expenditures, management fees, or administrative charges in CAM that tenants don’t expect.
• Budget uncertainty: Without proper negotiation, total occupancy costs can exceed initial projections. Working with experienced tenant representation helps protect against surprises.

What Should Tenants Negotiate in an NNN Lease?

1. CAM cap (3-5%/year): Limits annual increases in controllable operating expenses, the single most important tenant protection in an NNN lease.
2. Expense audit rights: The right to review the landlord’s books and verify that NNN charges match actual costs.
3. Capital expense exclusion: Ensure roof replacements, structural repairs, and major system overhauls are landlord responsibilities, not passed through as CAM.
4. Base year protection: Establish a base year for expenses so the tenant only pays increases above that benchmark.
5. Controllable vs. uncontrollable expenses: Separate expenses the landlord can influence (management fees, vendor contracts) from those they cannot (property taxes, insurance), and cap only the controllable portion.

What Are the Pros and Cons for Landlords?

Pros:

• Expense passthrough: Operating cost increases are borne by tenants, protecting the landlord’s net income.
• Predictable net income: Base rent flows directly to the bottom line with minimal variable expense exposure.
• Simpler property management: In single-tenant NNN leases, the tenant often handles day-to-day maintenance.
• Higher property value: Investment-grade NNN properties with credit tenants command premium valuations and lower cap rates.

Cons:

• Tenant default risk: If a tenant cannot pay NNN charges, the landlord must cover operating expenses until a replacement tenant is found.
• Market limitation: NNN structures are standard for industrial and retail space, but multi-tenant office tenants often prefer gross or modified gross leases. Experienced landlord representation helps position the property competitively.

How Are NNN Leases Used in Silicon Valley?

• Industrial and warehouse: Nearly all industrial leases in San Jose, Milpitas, and Fremont use NNN structures. Tenants pay base rent plus their share of taxes, insurance, and CAM, and often handle interior maintenance directly.
• Single-tenant retail: Freestanding retail buildings leased to national tenants (pharmacies, fast food, banks) are almost always NNN.
• Multi-tenant retail centers: Strip malls and shopping centers use NNN with CAM pools shared among all tenants.
• Investment-grade properties: Single-tenant NNN properties leased to credit tenants (Walgreens, Starbucks, FedEx) are popular among 1031 exchange investors seeking passive income with minimal management.

How to Evaluate an NNN Lease Proposal

1. Request 3 years of historical NNN expenses from the landlord, broken out by taxes, insurance, and CAM.
2. Calculate the annual growth rate for each category to identify trends.
3. Project forward over your lease term using historical growth rates plus a buffer for unexpected increases.
4. Add projected NNN to base rent to calculate your true total occupancy cost per square foot.
5. Compare to gross lease alternatives in the same market to determine which structure delivers better value over the full lease term.

Jacob Sanchez CRE provides this analysis for every NNN lease proposal, ensuring tenants and landlords enter agreements with full cost transparency.

Need Help Evaluating a Lease?

Whether you are negotiating a new NNN lease or reviewing renewal terms, Jacob Sanchez provides expert guidance on lease structures, expense analysis, and negotiation strategy across Silicon Valley.

Call (408) 603-8943 to schedule a consultation.

Jacob Sanchez is a licensed commercial real estate broker in San Jose, representing both tenants and landlords in NNN, gross, and modified gross lease transactions across Silicon Valley. CalBRE# 02064109 | BCCRE