California triple net leases function the same as net leases throughout the country. A triple net lease (also called a net-net-net or NNN lease) is a specific type of commercial lease agreement in which the tenant pays a base rent amount plus additional operating expenses of the property like utilities, taxes, insurance, and maintenance fees. Triple net leases can also include a management fee paid straight to the landlord. These types of agreements are common in industrial and retail properties that have multiple tenants since operating expenses can add up quickly.
NNN Leases Are Preferred with Commercial Property Landlords
Commercial property landlords generally prefer triple net leases since they essentially pass on all of the risk of unexpected expenses to the tenant. Often, the landlord will still handle the actions of maintaining an insurance policy, paying taxes, and marketing the property, but the tenants will cover all of the costs of doing so. The landlord is then insulated from additional costs like increased insurance rates, property tax liability amounts, and utility rate hikes. In most cases, landlords will collect lower base rent amounts in a triple net lease, since the tenant will be paying for all of the operating expenses as well.
Upsides to Triple Net Leases
The most obvious upside of a triple net lease is the lower base lease price when compared to a gross lease agreement, where the rent amount is high enough that the landlord is confident they will be able to pay all the property’s operating costs out of the rental pool. This arrangement can be particularly favorable to leasing space in a new property that doesn’t require a lot of maintenance and that has generally efficient utility usage.
Additionally, with a successful property where occupancy rates are high, the situation is beneficial for tenants since the building operation expenses will be split between a greater number of tenants, thereby keeping their costs down.
Tenants can also leverage their creditworthiness when negotiating the terms of a triple net lease since a good track record of financial responsibility and successful lease relationships will put them in a position to bargain for a lower base lease rate.
A triple net lease can also work in the landlord’s favor in terms of providing a steady, unchanging income each month. The landlord can effectively insulate themselves from any unexpected costs, such as the need to replace a roof, property tax increases, and so forth.
Downsides to Triple Net Leases
For tenants, the biggest downside of a triple net lease is that if something happens to the building or it’s damaged in some significant way, the repair costs can result in a significant jump in monthly expenses. Additionally, tenants must analyze their potential fellow tenants and ensure that they feel confident that there won’t be a huge amount of vacancies in the near future, which can also drastically increase monthly costs. Finally, the extra expense amounts in the triple net lease are usually paid straight to the landlord, which means that tenants generally cannot deduct the amounts on their taxes.
For landlords, it can be harder to find tenants willing to agree to a triple net lease, especially if the building is on the older side or if the property has a history of high vacancy rates. However, a properly negotiated triple net lease can benefit both tenants and landlords.
New at NNN Leases? Read Our More In-Depth Guide
Want to know more about triple net leases? You can find our in-depth Triple Net Lease guide.
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