How to Calculate NNN Rate (Triple Net Lease)
In commercial real estate, a Triple Net Lease (NNN) is a lease agreement on a property where the tenant or lessee promises to pay all the expenses of the property, including real estate taxes, building insurance, and maintenance. These payments are in addition to the fees for rent and utilities.
Understanding how to calculate your total monthly obligation is crucial when evaluating commercial spaces, as the advertised "Base Rent" is often significantly lower than the actual amount you will pay.
What are the 3 "N"s in NNN?
When you see a lease advertised as NNN, the tenant is responsible for the three main operating costs of the building:
- N – Property Taxes: The local government taxes assessed on the property.
- N – Insurance: The policy covering the building structure (not the tenant's contents).
- N – Common Area Maintenance (CAM): Costs to maintain shared spaces like parking lots, lobbies, landscaping, snow removal, and exterior lighting.
The NNN Calculation Formula
Commercial leases are typically quoted on an annual price per square foot basis. To calculate your actual costs, use the following logic:
1. Calculate Total Annual NNN Rate:
Taxes/SF + Insurance/SF + CAM/SF = Total NNN Rate
2. Calculate Gross Rate:
Base Rent/SF + Total NNN Rate = Gross Annual Rate
3. Calculate Monthly Payment:
(Gross Annual Rate × Square Footage) ÷ 12 = Total Monthly Payment
Example Scenario
Imagine you want to lease a 2,000 sq ft retail space. The landlord quotes a Base Rent of $20.00/sf NNN. The estimated NNN expenses are $5.00/sf.
- Base Rent Cost: 2,000 sq ft × $20.00 = $40,000 / year
- NNN Expenses: 2,000 sq ft × $5.00 = $10,000 / year
- Total Annual Cost: $50,000
- Monthly Payment: $50,000 ÷ 12 = $4,166.67
If you had only calculated based on the base rent, you would have estimated $3,333/month, underbudgeting by over $800 every month.