NNN Leases: Pros & Cons for Industrial Tenants

Introduction

For many industrial tenants—especially those in Texas—the triple-net (NNN) lease structure offers both transparency and potential pitfalls. While you’ll enjoy more control over expenses like property taxes, insurance, and maintenance, these costs can fluctuate unexpectedly. In this guide, we’ll break down how NNN leases work, explain their pros and cons, and show you how to negotiate favorable terms so you’re never caught off guard by surprise fees.

In this article, we’ll cover:

• ✅ How NNN leases work

• ✅ Pros and cons for industrial tenants

• ✅ How to calculate total lease costs

• ✅ Key negotiation strategies to protect your business

1. What Is a Triple-Net (NNN) Lease?

A Triple-Net (NNN) lease is a lease structure where the tenant pays for three major property expenses:

• 1️⃣ Property Taxes

• 2️⃣ Building Insurance

• 3️⃣ Common Area Maintenance (CAM) & Repairs

💡 Example:
A company leases 50,000 SF of warehouse space in Dallas with a base rent of $6 per SF, NNN lease.

• Base Rent: $6.00 x 50,000 SF = $300,000/year

• NNN Expenses: $2.50 per SF = $125,000/year

🔹 Total Lease Cost: $425,000 per year ($35,417 per month)

📖 Read more: "The Top 5 Mistakes Industrial Tenants Make When Leasing a Warehouse."

2. Pros of NNN Leases for Industrial Tenants

NNN leases provide transparency and flexibility for industrial tenants.

✅ Lower Base Rent Than Gross Leases

• Because tenants cover property expenses, landlords typically offer lower base rent.

✅ More Control Over Operating Costs

• Tenants manage maintenance, repairs, and service providers, preventing landlords from overcharging.

✅ Transparency in Expense Breakdown

• NNN leases outline exact property tax, insurance, and maintenance costs, reducing surprise fees.

✅ Long-Term Lease Stability

• Industrial NNN leases typically range from 5-15 years, ensuring stable tenancy and business continuity.
  
  

💡 Pro Tip: NNN leases favor tenants with efficient cost management strategies.

📖 Read more: How to Negotiate an Industrial Lease That Protects Your Business.

3. Cons of NNN Leases for Industrial Tenants

📌 NNN leases require tenants to assume responsibility for expenses that fluctuate over time.

🔴 Unpredictable Property Tax Increases

• Property tax rates can rise significantly, especially in Texas.

• If the landlord sells the property at a higher valuation, tenants could see a sudden tax increase.

🔴 Maintenance & Repair Responsibilities

• Tenants must pay for roof repairs, HVAC servicing, and general upkeep.

• Older buildings can have hidden deferred maintenance costs.

🔴 Higher Upfront Costs Compared to Gross Leases

• Tenants must budget for NNN fees in addition to base rent.

• Some businesses struggle with fluctuating maintenance costs.

💡 Example of Unexpected Maintenance Costs:
A tenant signs a 10-year NNN lease but later discovers:

• HVAC system needs replacing → $40,000+ cost

• Roof requires repairs → $25,000 expense
  
  

💡 Pro Tip: Always request a property condition assessment (PCA) report before signing an NNN lease.

📖 Read more: How to Conduct a Feasibility Study for an Industrial Development Project.

4. How to Calculate Total Lease Costs in an NNN Lease

NNN leases include multiple cost components—understanding them is crucial for budgeting.

A. Full Lease Cost Calculation Formula

Total Lease Costs = (Base Rent + NNN Expenses) x Square Footage

💡 Example Calculation:
A 100,000 SF warehouse in Houston has:

• Base Rent: $7 per SF

• Property Taxes: $1.80 per SF

• Insurance: $0.80 per SF

• CAM (Common Area Maintenance): $1.40 per SF

Total Lease Costs = ($7.00 + $1.80 + $0.80 + $1.40) x 100,000 SF = $1,200,000 per year

🔹 Monthly Cost: $100,000 per month

💡 Pro Tip: Always ask for historical NNN expense trends to anticipate cost increases.

📖 Read more: The Hidden Costs of Industrial Real Estate Investing.

5. Key Lease Negotiation Strategies for NNN Tenants

NNN leases are negotiable—tenants should protect themselves from unexpected cost increases.

✅ 1. Cap Annual NNN Increases

• Negotiate a maximum annual increase (e.g., 5%) on CAM charges.

• Request landlord-provided cost history for taxes, insurance, and maintenance.

✅ 2. Ensure Landlord is Responsible for Structural Repairs

• Negotiate for roof, HVAC, and foundation repairs to be landlord’s responsibility.

• If tenants must maintain HVAC, ask for a landlord-funded replacement allowance after 5+ years.

✅ 3. Request Expense Audits & Transparency

• Tenants should request annual CAM reconciliation statements to verify actual expenses.

• Some landlords overcharge for maintenance fees—regular audits can prevent overpayments.

✅ 4. Secure Expansion & Early Termination Clauses

• If the business outgrows the space, having an option to lease adjacent units provides flexibility.

• An early termination clause with a defined buyout amount can prevent costly lease exits.
  
  

💡 Pro Tip: Work with an experienced industrial leasing advisor to negotiate favorable NNN lease terms.

📖 Read more: How to Negotiate an Industrial Lease That Protects Your Business.

6. Final Thoughts: Is an NNN Lease Right for Your Business?

NNN leases offer lower base rent and expense transparency but require careful budgeting.

✅ Best for:

• ✔ Large industrial tenants who can manage maintenance efficiently.

• ✔ Companies looking for long-term occupancy stability.

• ✔ Businesses that want more control over operating expenses.

❌ May not be ideal for:

• 🔴 Small businesses unprepared for fluctuating property costs.

• 🔴 Tenants leasing in markets with rapid property tax increases.

📞 Need help evaluating an NNN lease? Schedule a Consultation Today.