Commercial tenants have more complex needs than residential tenants. Therefore, contracts with special parameters and allowances are often needed. There are a few different kinds of commercial leases, the most common being the Triple Net Lease (NNN Lease). Here is a look at this complex lease agreement and the scenarios in which it is commonly used.
Table of Contents
What is a Triple Net Lease Agreement?
Triple Net Lease Example
Triple Net Lease Pros and Cons
Is a Triple Net Lease a Good Idea?
Types of Net Leases
How Do You Calculate a Triple Net Lease?
Triple Net Lease Agreement Bottom Line
What Is a Triple Net Lease Agreement?
A triple net lease agreement is a property contract that requires the tenant, and not the property owner, to pay taxes, insurance, and any maintenance that is necessary throughout the duration of the agreement. Under normal lease conditions, these fees would be the responsibility of the property owner. However, triple net leases offer certain advantages to commercial tenants for taking on these extra responsibilities.
The tenant is still expected to make regular rent payments and other fees, as well as utility payments or other necessary bills. However, NNN Leases often require a lower monthly rent payment because the tenant is assuming many of the carrying costs landlords are typically expected to pay. Plus, it gives tenants additional freedom with what they do with the property because they pay the maintenance costs. Triple net leases are the most common. However, net leases and double net lease options are available as well and require partial payments of the same fees.
Triple Net Lease Example
Tenant agrees to pay, in addition to the Base Rent, all expenses associated with the Property, including but not limited to property taxes, property insurance, and maintenance and repair costs. Tenant shall be responsible for all utilities and operating expenses during the term of the Lease.
- Property Taxes: Tenant shall pay all property taxes directly to the taxing authority before they become delinquent.
- Insurance: Tenant shall obtain and maintain property insurance covering the full replacement cost of the Property and liability insurance with coverage amounts satisfactory to the Landlord.
- Maintenance and Repairs: Tenant shall be responsible for all maintenance and repairs, including but not limited to the roof, structural components, HVAC systems, plumbing, and electrical systems.
In the event of Tenant’s default under this Lease, Landlord shall have the right to pursue all remedies available at law or in equity, including but not limited to termination of this Lease and recovery of possession of the Property.
This Lease constitutes the entire agreement between the parties and supersedes all prior negotiations, representations, or agreements, whether written or oral.
Triple Net Lease Pros and Cons
Advantages for Landlords
- Predictable Income: The landlord receives a stable income from the base rent while avoiding variable expenses.
- Lower Management Responsibility: Tenants handle property management, reducing the landlord’s responsibilities.
Advantages for Tenants
- Control Over Property: Tenants have greater control over maintenance and operational aspects, ensuring the property is maintained to their standards.
- Potentially Lower Rent: Base rent may be lower compared to gross leases since tenants assume additional costs.
Disadvantages for Landlords
- Market Sensitivity: During economic downturns, tenants may struggle to pay all expenses, increasing vacancy risk.
- Complex Agreements: Detailed lease agreements are required to specify all tenant responsibilities.
Disadvantages for Tenants
- Unpredictable Costs: Property expenses can fluctuate, leading to higher total costs.
- Maintenance Responsibility: Tenants must handle all repairs and maintenance, which can be burdensome.
Is a Triple Net Lease a Good Idea?
It depends on the scenario, but triple net leases can be a very good idea for many commercial tenants. NNN Leases have become popular amongst commercial investors because they offer long-term stability (NNN leases are typically 10-15 years), built-in rent escalation, and alleviation of some of the headaches of being a landlord. For tenants, NNN leases offer lower rents and more freedom to make specific alterations.
NNN leases are common amongst large companies who expect to be in an office space or storefront for an extended period. Therefore, don’t mind taking on some extra financial burdens in exchange for a rent reduction and a hands-off landlord.
However, NNN leases do have drawbacks for tenants. Substantial damage to the property from vandalism or natural disaster could leave them on the hook to pay for extensive repairs. Mom-and-pop stores will likely avoid NNN leases unless they have other motivations for doing so because it leaves them vulnerable to paying exorbitant fees that may threaten their business. But larger companies with comfortable insurance policies and cash reserves to cover unexpected costs may benefit from an NNN lease.
Types of Net Leases
- Single Net Lease
- Double Net Lease
- Triple Net Lease
1. Single Net Lease (N)
In a single net lease, the tenant is responsible for paying property taxes on the property.
2. Double Net Lease (NN)
In a double net lease, the tenant is responsible for paying property taxes and insurance on the property.
3. Triple Net Lease (NNN)
In a triple net lease, the tenant is responsible for paying property taxes, insurance, and all other operating expenses for the property, including maintenance and repairs.
How Do You Calculate a Triple Net Lease?
NNN Leases are calculated by taking the annual property taxes and insurance payments for space or building and dividing that by total square footage being rented, then adding estimated monthly maintenance costs.
If you are renting to multiple tenants in one building, you should also consider the cost of upkeep related to common areas. For example, if you own a mall and have a cleaner that comes every night, you must figure that into the calculation if the tenant is expected to contribute.
Finally, take all these fees and add them to the annual rent. You can divide that figure by twelve to determine the monthly rate. Typically, NNN leases will spell out how the landlord arrived at the figure. Commercial leases are quoted in two separate parts: rent and operating expenses. Tenants will be quoted a price per square foot for operating expenses as well as the agreed-upon base rent. For example, a space may be quoted as $5000 per month plus $20 per square foot in NNN costs.
Triple Net Lease Agreement Bottom Line
A triple net lease shifts many financial responsibilities from the landlord to the tenant, offering benefits and challenges to both parties. Triple net leases are great for tenants who want more control over the property and are willing to take on the additional responsibilities and costs associated with the property's maintenance and operation. For landlords, Triple net leases allow them to minimize their responsibilities, as the tenants will be responsible for the costs related to owning the property, such as maintenance, property taxes, and insurance.
It’s essential for both landlords and tenants to clearly outline all terms and responsibilities in the lease agreement to avoid misunderstandings and ensure a smooth leasing relationship.