A lease explicitly allocates the named property taxes, insurance and maintenance to the tenant in addition to base rent. Which description fits these stated conventional terms?
Correct Answer
B) Triple-net allocation of the specified three expense categories.
Under the stated conventional triple-net allocation, the tenant bears base rent plus the specified taxes, insurance and maintenance. Actual NNN contracts can retain costs with the owner or contain caps and exclusions; verify terms. The label does not automatically include the lessor’s debt service or every capital replacement.
Why This Is the Correct Answer
Option B is correct because the tenant bears base rent plus the three specified categories of taxes, insurance and maintenance, which is the conventional triple-net allocation. Actual contracts can vary, so the specific terms still need to be verified.
Why the Other Options Are Wrong
Option A: Full-service gross with the landlord paying all listed costs.
Option A describes full-service gross with the landlord paying all listed costs. Here the tenant pays the taxes, insurance and maintenance, which is the opposite allocation.
Option C: Percentage rent, because the tenant pays the expenses.
Option C calls this percentage rent because the tenant pays expenses. Percentage rent ties rent to the tenant's sales, not to who pays operating expenses.
Option D: Tenant payment of the landlord’s mortgage obligations.
Option D says the tenant pays the landlord's mortgage obligations. A triple-net lease covers property operating costs, not the lessor's debt service.
Three nets: tax, insurance, maintenance
Triple net conventionally means the tenant pays three expense groups: taxes, insurance and maintenance.
How to use: Use this to identify a conventional NNN lease, then verify the actual contract terms.
Exam Tip
Match the label to the stated allocation, but remember that real leases can carve out caps or exclusions, so the contract controls.
Common Mistakes to Avoid
- -Assuming a triple-net label covers the landlord's mortgage
- -Confusing percentage rent with expense pass-throughs
- -Relying on the lease label without reading the terms
Concept Deep Dive
Analysis
This question tests recognition of lease types by expense allocation. When the tenant pays base rent plus property taxes, insurance and maintenance, the conventional label is triple net.
Background Knowledge
Responsibility for expenses such as taxes, insurance, utilities and maintenance varies with lease terms. Under a net lease the tenant pays some or all property expenses in addition to rent; the triple-net label conventionally refers to taxes, insurance and maintenance.
Real-World Application
Reviewing a drugstore lease, an appraiser confirms the tenant reimburses taxes, insurance and common maintenance, but notices the landlord keeps roof and structure. She models those retained costs rather than relying on the NNN label alone.
More Income Approach Questions
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The subject property is a medical office building with annual potential base rent of $300,000 and 5% vacancy and collection loss on that rent. Tenants reimburse the landlord $30,000 of building costs a year, stated at collected amounts. The landlord pays $135,000 of annual expenses, including property taxes and the reimbursed costs. Tenants also pay $25,000 of electricity a year directly to the utility. Sales of similar buildings indicate an 8% overall rate. What is the indicated value by direct capitalization?
Next Question
The subject property has annual EGI of $99,000. Operating expenses other than reserves total $29,700, and the annual reserve is $3,300. The 8% overall rate was extracted from sales with income stated after the same reserve. What value is indicated?