Triple Net Lease Meaning and What NNN Rent Does Under ASC 842

The triple net lease meaning is simple: in a triple net (NNN) lease, the tenant pays base rent plus three "nets." Those are property taxes, building insurance and common area maintenance (CAM). The landlord collects a rent that is net of those operating costs.

Fixed base rent is a lease payment under ASC 842-10-30-5, so it lands on the balance sheet. The three nets are usually billed on actual cost. They run through the income statement as incurred (ASC 842-20-25-6(b) for an operating lease, 25-5(b) for a finance lease).

That split is the part that matters to a controller. Two leases with the same total cash cost can put very different numbers on the balance sheet, depending on how the rent is written. This page walks through the structures, then the accounting.

What is an NNN lease, charge by charge?

An NNN lease breaks occupancy cost into four pieces. Each one is billed and paid differently, which is why each one gets its own accounting answer.

• Base rent. The fixed amount for the space, often with scheduled escalations or a CPI adjustment.
• Property taxes. The tenant pays the real estate tax on the property, or its pro rata share in a multi-tenant building.
• Building insurance. The tenant pays the premium on the landlord's property policy, or its share of it.
• CAM. The tenant pays its share of cleaning, snow removal, parking lot upkeep, lighting and similar work on the shared areas.

In practice the landlord usually bills estimates monthly and trues them up to actual costs after year-end. That true-up is what makes most NNN charges variable, and variable is the word that decides the accounting.

How do gross vs net leases compare?

Real estate uses these labels loosely, and no standard defines them. The table shows the usual market convention. The lease itself always controls, so read the expense and repair clauses before you rely on the label.

In a gross lease, the rent is one fixed number and the landlord carries the operating costs. A modified gross lease sits in between. A common version passes through increases over a base year, while the landlord keeps the base amount.

What does a double net lease mean?

A double net lease means the tenant pays base rent plus property taxes and building insurance. The landlord keeps CAM and structural repairs. On the books, it behaves like an NNN lease with one fewer variable charge.

What is an absolute net lease?

An absolute net lease pushes nearly every cost to the tenant, including the roof, structure and major systems. It is most common on single-tenant buildings. The tenant carries the repair risk that an NNN tenant usually leaves with the landlord.

What does the landlord pay in a triple net lease?

Under a typical NNN lease, the landlord keeps the structural and capital costs: usually the roof and foundation, plus its own mortgage, income taxes and general overhead. Some NNN leases also move the roof to the tenant, which is why the repair clause matters more than the label.

For the tenant's accountant, the landlord's own costs never touch the tenant's books. What matters is which costs the tenant must pay, and whether each amount is fixed or variable.

How does ASC 842 treat each NNN charge?

ASC 842 sorts every payment in a contract into three buckets: lease components, nonlease components, and things that are not components at all. Under ASC 842-10-15-30, components include only items that transfer a good or service to the lessee. Paragraph 842-10-15-30(b) then names reimbursement of the lessor's costs as something that is not a component.

That is why taxes and insurance fall outside both buckets. They pay the landlord's bills and do not give the tenant anything beyond the right to use the space. CAM is different, because the landlord performs a service the tenant would otherwise buy. Deloitte's Roadmap: Leases, section 4.3 puts it plainly: CAM is a nonlease component, while tax and insurance reimbursements are noncomponents.

These rows assume the practical expedient is elected or there is no separate CAM. If CAM is separated, fixed and variable tax and insurance payments are allocated between the lease and CAM like the rest of the consideration (ASC 842-10-55-145; KPMG Handbook: Leases, Question 4.2.50 and paragraph 4.4.180).

The separated-CAM row follows KPMG Handbook: Leases, Example 4.2.40. So does PwC's Leases guide, section 2.4, which says: "When variability is resolved (i.e., payment amount is known), allocate on the same basis as the initial allocation of consideration."

The tax and insurance rows come straight from Example 12 in ASC 842-10-55-141 through 55-145. When the tenant reimburses actual taxes and premiums, those amounts are variable lease payments. They are excluded from the lease liability (ASC 842-10-30-6(a); KPMG Handbook: Leases, paragraph 4.2.110 and Question 4.2.50).

When the lease states one fixed amount that covers rent, taxes and insurance, and there is no separate CAM or the practical expedient is elected, the whole amount is a lease payment (ASC 842-10-55-145).

It also does not matter whether the tenant pays the tax authority directly or reimburses the landlord. Paragraph 842-10-15-30(b) covers both routes. Your own liability policy is different. The KPMG Handbook: Leases (Question 4.2.40, Example 4.2.10 and paragraph 4.2.150) treats insurance that mainly protects the tenant as the tenant's own cost, outside the lease accounting.

The practical expedient in ASC 842-10-15-37 is a policy election by class of underlying asset. A lessee may elect it for real estate so it does not have to allocate rent between the space and CAM. Under the expedient, CAM billed on actual cost is a variable lease payment (KPMG Handbook: Leases, Example 4.2.40). The lease component guidance covers that allocation in more depth.

What does triple net rent do to the lease liability and ROU asset?

The lease liability is the present value of the lease payments not yet paid at commencement, under ASC 842-20-30-1. Variable payments that do not depend on an index or rate are excluded by ASC 842-10-30-6(a). So in an NNN lease, only the base rent usually drives the liability. The right-of-use (ROU) asset starts from that liability under ASC 842-20-30-5.

Here is one retail space written three ways. Every input is stated so the arithmetic can be checked.

• Lease term: 5 years, operating lease, payments made annually at the end of each year
• Discount rate: 6%, giving an annuity factor of 4.212364
• Base rent: $120,000 a year
• Expected taxes $18,000, insurance $6,000 and CAM $12,000 a year, or $36,000 in total
• No payments at or before commencement, no incentives and no initial direct costs
• The lessee has elected the practical expedient for real estate

The cash is the same $156,000 a year in all three cases. The balance sheet is not. The gross version carries $151,645 more liability than the NNN version, because the $36,000 is fixed ($36,000 × 4.212364). See the ROU asset calculation guide for the full build of the asset.

Without the expedient, the gross lease changes. No consideration goes to the taxes and insurance themselves, because they are not a component. The full $156,000 is allocated between the space and CAM (ASC 842-10-55-145). Only the space's share would be a lease payment.

How does an NNN lease hit the income statement?

For an operating lease, ASC 842-20-25-6(a) gives a single straight-line lease cost. In the NNN case above, that is $120,000 a year. ASC 842-20-25-6(b) then adds variable lease payments in the period the obligation is incurred. For a finance lease, ASC 842-20-25-5(b) says the same about variable payments.

So year 1 of the NNN lease shows $120,000 of straight-line cost plus the actual nets. If the landlord's true-up bills an extra $2,000 of tax, that $2,000 is expense in the period it is incurred. The true-up does not remeasure the lease liability (ASC 842-20-25-6(b); KPMG Handbook: Leases, Question 4.5.10 and paragraph 4.4.221).

This is how the old executory costs of ASC 840 now show up. ASC 842 does not carry forward ASC 840's executory-cost treatment. Two tests decide it instead: whether the cost is the lessor's (ASC 842-10-15-30(b)), and whether the payment is fixed or variable (ASC 842-10-30-5 and 30-6) (KPMG Handbook: Leases, paragraph 4.4.180). Rent tied to an index follows a different rule, covered in accounting for future CPI increases.

Operating or finance classification is a separate question, covered in operating vs finance lease types. For the charges that surprise tenants after signing, see the hidden costs in a lease.

Frequently asked questions

What is triple net rent?

Triple net rent is the base rent in an NNN lease. It is the landlord's return for the use of the space, before the tenant's separate share of property taxes, building insurance and common area maintenance. Fixed base rent is a lease payment under ASC 842-10-30-5 and goes into the lease liability.

Are property taxes in a triple net lease included in the lease liability?

Not when they vary. Property taxes are a reimbursement of the landlord's cost, so they are not a component of the contract under ASC 842-10-15-30(b). If the tenant pays the actual bill each year, the payments are variable and are expensed as incurred. If the lease fixes the amount, the fixed amount is a lease payment and is included.

Is CAM a lease payment under ASC 842?

Not by default. CAM is a service from the landlord, so it is a nonlease component. It becomes part of the lease payments only if the tenant elects the practical expedient in ASC 842-10-15-37 for that asset class. Even then, CAM billed on actual costs is a variable lease payment and stays out of the liability.

Sources and further reading

• Deloitte, Roadmap: Leases, section 4.3, Identify the Separate Nonlease Components: CAM as a nonlease component and taxes and insurance as noncomponents.
• KPMG Handbook: Leases:
  • Paragraph 4.2.110: variable taxes and insurance in a net lease.
  • Question 4.2.40, Example 4.2.10 and paragraph 4.2.150: the tenant's own insurance.
  • Question 4.2.50 and paragraph 4.4.180: taxes and insurance when CAM is separated.
  • Question 4.3.20: variable CAM kept out of the consideration.
  • Example 4.2.40: variable CAM, with and without the expedient.
  • Question 4.5.10 and paragraph 4.4.221: a true-up does not remeasure the liability.
• PwC, Leases guide, section 2.4, Separating lease and nonlease components: allocating variable payments once the amount is known.
• FASB ASC 842-10-15-30, 15-31, 15-35 and 15-37; 842-10-30-5 and 30-6; 842-10-55-141 to 55-145 and 55-150 to 55-151; 842-20-25-5, 25-6 and 30-1.

Explore how iLeasePro can streamline your lease portfolio management!

Tour of iLeasePro

Schedule a Demo

Check Out Knowledge Base

If this guide proved beneficial, please share it with fellow colleagues or bookmark it for future reference. Keep an eye out for more deep dives into the intricate world of lease accounting and corporate taxes and how the ASC 842 Lease Accounting Standard impacts them.