Commercial tenants have more complex needs than residential tenants. Therefore there is often a need for contracts with special parameters and allowances. There are a few different kinds of commercial leases, the most common being the Triple Net Lease (or NNN Lease). Here is a look at this complex lease agreement and the scenarios in which it is commonly used.
Understanding NNN Leases
A triple net lease is a lease agreement on a property that requires the tenant - not the property owner- to pay taxes, insurance, and any maintenance that is necessary throughout the agreement. Under normal lease conditions, these fees would be the responsibility of the property owner. But NNN leases offer certain advantages to commercial tenants for taking on these extra responsibilities.
The tenant is still expected to make regular rent payments and the other fees, as well as any utility payments or other necessary bills. But, 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 freedoms 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 leases options as well and require partial payments of the same fees.
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.
For instance, if CVS or Walgreens decides to rent a location to test its viability, they may sign an NNN Lease to alter the interior to match their other locations. The owner must approve any significant structural changes, but cosmetic alterations are typically permitted because the tenant is paying for the maintenance.
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.
What is the difference between Net and Triple Net Leases?
They are four different types of leases; gross, net, double net, and triple net.
A gross lease is your typical lease agreement where the tenant is responsible for rent, but all the other expenses are the landlord's responsibility. A net lease is a lease in which the tenant is responsible for paying both rent and property taxes. However, the landlord is responsible for maintenance and insurance. A double net lease is a lease where the tenant pays rent, taxes, and insurance, but the landlord is responsible for maintenance. A triple net lease is a lease that requires the tenant to be responsible for all four payments – rent, taxes, insurance, and maintenance.
So, each “net” corresponds with an additional payment that the tenant is expected to pay. Typically, this also corresponds with a further reduction in rent to compensate for the extra cost. However, that is up to the tenant and landlord to agree upon privately, like any real estate contract.
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.