What Does A Landlord Pay in Triple Net Lease?

17 May, 7:32 am

When it comes to commercial real estate, the intricacies of lease agreements can sometimes feel like a complex puzzle. Triple net leases (NNN leases) are a prime example of this, where tenants shoulder not only the base rent but also an array of additional expenses. 

But have you ever wondered what the landlord’s financial responsibilities are in a triple-net lease? 

In this blog post, we will take an in-depth look at the often-overlooked aspects of triple-net leases, unveiling what landlords are responsible for paying.


Definition and Explanation of a Triple Net Lease (NNN)


A triple net lease, often abbreviated as an NNN lease, is a commercial lease agreement that transfers a significant portion of financial responsibilities from the landlord to the tenant.

In a triple net lease, the tenant assumes the base rent and additional expenses related to the property, such as property taxes, insurance premiums, and maintenance costs. This differs from a single net lease, where the tenant is responsible for only one additional expense, usually property taxes. [1]

This allocation of financial obligations allows the landlord to shift the costs associated with property ownership and maintenance to the tenant, creating a more predictable income stream for the landlord. At the same time, tenants can save money by managing property expenses and making cost-effective maintenance, repairs, and upgrade decisions.

Triple net leases can be utilized in properties across different sectors. Here is a list of property types where triple net leases are commonly employed:

  • Retail Properties
  • Office Buildings
  • Industrial Properties:
  • Warehouse and distribution centers
  • Medical office buildings
  • Restaurants
  • Banks and Financial Institutions

It is important to note that while triple net leases can be applied to a wide range of property types, their suitability may depend on specific market conditions and tenant requirements. Later we will talk about the things to consider before investing in these types of properties.


Financial obligations related to a triple net lease

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Financial Obligations of a Tenant in a Triple Net Lease


– Real Estate Taxes Costs

Real estate taxes, also known as property taxes, are assessed by local governments based on the property’s estimated value. These taxes contribute to funding various public services and infrastructure within the jurisdiction. The specific tax rate and assessment method can vary depending on the location and applicable regulations. [2]

As part of the triple net lease agreement, a tenant pays their portion of property taxes directly to the taxing authority. The lease agreement typically outlines the exact calculation of the tenant’s share of taxes. 

It can be based on various factors, such as the percentage of the leased space about the entire property or a specific allocation formula agreed upon by both parties.


– Insurance Costs 

Insurance plays a vital role in protecting the property and mitigating potential risks. As a tenant, understanding your responsibilities regarding insurance is crucial for effective risk management and financial planning.

Typically, the lease agreement outlines the specific insurance requirements and the types of coverage tenants are expected to obtain. These requirements may include general liability insurance, property insurance, and sometimes additional coverage such as business interruption or umbrella liability insurance.

The tenant is responsible for procuring and maintaining the required insurance policies, including paying the associated premiums. This also ensures that both the tenant’s operations and the property are adequately covered in the event of accidents, damage, or liability claims.


– Maintenance and Repair Costs

Tenants are also responsible for the leased premises’ day-to-day operating expenses, maintenance, and repair. This includes both routine maintenance tasks and unforeseen repairs that may arise during the lease term.

The tenant is expected to keep the property in good condition and promptly address any necessary repairs to ensure its proper functioning and appearance.

The lease agreement usually outlines the tenant’s obligations regarding maintenance and repair, specifying the level of care and compliance expected.


financial obligations of landlords in triple net lease in LA

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Financial Obligations of a Landlord in a Triple Net Lease


– Mortgages

When landlords secure a mortgage on the property, they become responsible for making regular mortgage payments to the lending institution. These payments typically include principal and interest and are essential to repay the borrowed funds over the loan term. The specific times of the mortgage, including interest rates, repayment schedule, and duration, are determined during the loan origination process.

and certain property expenses. However, mortgage payments are generally not the tenant’s responsibility. Instead, the landlord uses the rent received from the tenant to cover the mortgage payments.

– Property Insurance

The landlord is responsible for obtaining and maintaining adequate property insurance coverage as the property owner. This insurance typically covers damages caused by fire, natural disasters, vandalism, theft, and other unforeseen incidents. The specific coverage and policy details are outlined in the insurance contract.

Property insurance ensures that the property remains protected and can be restored or repaired in case of damage or loss. It provides financial support to cover the costs of repairs, replacements, or rebuilding, minimizing the financial burden on the landlord.

In a triple-net lease, the tenant may be required to contribute to the property insurance fees This contribution is usually outlined in the lease agreement and is commonly referred to as the tenant’s proportionate share of insurance expenses. The tenant’s share is typically determined based on factors such as the size of the leased space about the entire property or a specific allocation formula agreed upon by both parties.

– Maintenance and Repair Costs

This is for major structural repairs to the property, including the roof, foundation, and building envelope. These repairs are essential to ensure the long-term stability and integrity of the property.

Furthermore, The maintenance and upkeep of CAMs, or Common Area Maintenance expenses, which include the costs required to care for and maintain shared areas within a property, such as lobbies, hallways, parking lots, and landscaping also falls under the landlord’s responsibility.

In some cases, these costs may be divided among tenants in a shopping center, while in other instances, they may be handled by the landlord as part of a gross lease agreement.


Advantages of triple net leases to landlords in LA

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Advantages of Triple Net Lease for Landlords


Triple net leases offer several advantages for landlords, making them a popular choice in commercial real estate. Let’s explore some of the critical benefits that landlords can achieve when entering into a triple net lease arrangement:

– Stable and Predictable Income

As we have mentioned earlier, one of the primary advantages of a triple-net lease for landlords is the potential for regular and predictable income. In a triple net lease, the tenant assumes the responsibility for paying not only the base rent but also additional expenses.

This arrangement allows landlords to receive a consistent income stream without fluctuating other expenses.

– Reduced Financial Risk

By shifting the financial responsibility for property expenses to the tenant, landlords can mitigate their financial risk. The tenant becomes responsible for paying property taxes, insurance premiums, and maintenance costs, which can often be significant. 

This reduces the landlord’s exposure to unexpected financial burdens and allows for better financial planning and stability.

– Reduced Financial Risk

By shifting the financial responsibility for property expenses to the tenant, landlords can mitigate their financial risk. The tenant becomes responsible for paying property taxes, insurance premiums, and maintenance costs, which can often be significant. 

This reduces the landlord’s exposure to unexpected financial burdens and allows for better financial planning and stability.

– Potential for Higher Property Value

Triple net leases can increase the value of a property. The long-term lease commitments from tenants and the stable income stream generated by triple net leases can make the property more attractive to investors and lenders.

Increased value can provide landlords with better financing options and potentially higher investment returns.

– Diversification of Tenant Base

It also enables landlords to diversify their tenant base. Landlords can reduce their exposure to specific market risks by attracting tenants from various industries and sectors. This diversification helps spread the risk and enhances the stability of the property’s income stream.


tenant considering risks associated with triple net lease in LA

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Risks Associated With Triple Net Lease for Landlords


It’s important to note that while triple net leases offer several advantages, there are also potential risks and considerations that landlords should evaluate. 

Engaging in thorough due diligence and seeking professional advice can help landlords make informed decisions and maximize the benefits of triple-net leases. Here are some risks associated with triple net leases for landlords:

– Tenant Default

The landlord may face financial challenges if the tenant fails to meet their financial obligations, such as paying rent or covering property expenses. Tenant default can lead to a loss of rental income and the burden of assuming the tenant’s financial responsibilities, including property expenses.

– Vacancy and Lack of Rental Income

If the property remains vacant for an extended period, the landlord may experience a lack of rental income. In a triple net lease, the tenant’s responsibility for property expenses continues, even during vacancy periods. 

Landlords should consider the potential impact of market conditions on tenant demand and lease renewals to mitigate the risk of prolonged vacancies.

– Property Condition and Maintenance

Although tenants are responsible for property maintenance and repairs, ensuring tenants fulfill these obligations can be challenging. Landlords should actively monitor the property’s condition and have mechanisms to enforce lease terms related to maintenance. 

– Lease Negotiation Challenges

Negotiating the terms of a triple-net lease can be complex, especially when determining the allocation of property expenses.

Disagreements or misunderstandings regarding expense responsibilities can lead to conflicts with tenants. Careful attention should be given to lease drafting and legal advice to ensure clarity and fairness.


landlord considering aspects of triple net lease in LA

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Things to Consider Before Investing in Triple Net Properties


If you’re considering investing in triple-net lease properties, evaluating various factors is essential to make an informed decision carefully. 

While triple net leases can offer advantages, important considerations can impact your investment’s success and profitability.

Here are some key things to consider before investing in triple net properties:

– Tenant Creditworthiness

Before entering into a triple net lease, thoroughly assess the prospective tenant’s creditworthiness and financial stability. A strong tenant with a solid track record and a healthy financial standing is more likely to fulfill their lease obligations and provide a stable income stream.

Conducting thorough tenant due diligence, including reviewing financial statements, credit history, and tenant business operations, is crucial in assessing tenant reliability.

– Location and Market Dynamics

The property’s location is significant in its attractiveness to tenants and potential for long-term success. Evaluate the local market dynamics, including tenant demand, competition, and economic indicators.

Consider factors such as population growth, employment trends, infrastructure development, and proximity to amenities. Investing in these types of properties in thriving and stable markets can increase the chances of maintaining high occupancy rates and rental income.

– Lease Terms and Rent Escalation

Carefully review the lease terms and understand the rent escalation provisions. Triple net leases often have long lease terms, spanning several years, with built-in rent increases. 

Evaluate the rent escalation mechanism, such as fixed annual increases or tied to a specific index. Consider the potential impact of rent escalations on the property’s profitability and assess whether they align with market trends and possible tenant affordability.

– Property Condition and Maintenance History

Assess the property’s condition and maintenance history to determine potential risks or ongoing maintenance requirements. Engage professional property inspectors to conduct thorough due diligence and identify structural issues or deferred maintenance.

Understanding the property’s current state can help estimate future maintenance and repair costs, ensuring the tenant’s financial obligations adequately cover these expenses.

– Finance and Capital Requirements

Consider the financial aspects of acquiring and managing triple net properties. Evaluate your financing options, including the down payment, interest rates, loan terms, and potential cash reserves required.

Assess your ability to handle any unforeseen expenses or periods of vacancy. Adequate financial planning and a thorough understanding of the investment’s financial implications are crucial for long-term success.

– Exit Strategy

It’s crucial to have exit strategy options before investing in any kind of property. Understand the potential liquidity challenges associated with selling or exiting the investment.

Having a clear exit strategy in mind can help you make informed decisions and maximize your investment returns when the time comes to sell. [3]

– Legal and Tax Considerations

It is crucial to gain a comprehensive understanding of the legal and tax ramifications associated with investment properties. The specifics of triple net lease agreements, property ownership structures, and tax obligations can vary depending on the jurisdiction and unique circumstances. 

By seeking professional advice, you can ensure compliance with relevant laws and regulations while optimizing the potential tax advantages linked to triple-net property investments.


Meeting with lawyers about a triple net lease in LA

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In conclusion, understanding what the landlord pays in a triple net lease is crucial for both tenants and landlords involved in commercial real estate. By transferring a significant portion of financial responsibilities to the tenant, landlords can benefit from a more predictable income stream and reduced financial risk.

Landlords typically cover major structural repairs, property taxes, insurance costs, and common area maintenance. However, it’s important to carefully negotiate lease terms and consider potential risks and expenses associated with triple net leases.

Ultimately, having a clear understanding of the financial obligations in a triple net lease can lead to successful lease arrangements and mutually beneficial outcomes for both parties involved.

If you’re a landlord in Greater Los Angeles, Malibu, Pacific Palisades, or Westwood looking to hire a property management company to handle your investment, look no further than Lotus Properties!

With our extensive experience, dedication to exceptional service, and deep knowledge of the local market, we are committed to maximizing your property’s potential and ensuring a hassle-free experience for you as a landlord.





1 – Investopedia

2 – Property Tax California

3 – Exit strategies