If you are on the market for a commercial lease, you probably have encountered the term Triple Net lease, also known as NNN lease. It is a typical lease structure in commercial real estate. It is especially true when it comes to free-standing commercial buildings with a single tenant, but also in some cases for retail spaces. They are also prevalent in some areas, especially in larger cities or locations in high demand.
But how does a Triple Net commercial lease work? What should tenants keep in mind when considering taking on an NNN lease? Here is everything you need to know.
What is a Triple Net commercial lease?
In the case of most residential leases, the landlord is responsible for most of the costs associated with direct overhead costs, such as taxes, insurance, operating expenses, utilities, etc. This type of lease is known as a gross lease.
On the other hand, with commercial leases, the tenant is usually responsible not only for the base rent but also for at least some of the costs associated with overheads. Such expenses can be divided into three main posts: property taxes, insurance, and common area maintenance. When the tenant is the one who pays part or the totality of those expenses, it is a net lease. The terms of each contract vary widely from one to another. However, when the tenant takes on all three posts, it is a Triple Net (or NNN) lease.
An NNN lease doesn’t necessarily mean that the tenant is responsible for every single cost associated with the building. It is up to the lessor and the lessee to negotiate the terms of the contract. For example, the tenant may ask that the landlord bears the cost of the most substantial building upgrades. Landlords often use the label “triple net” on the lease. However, it is up to the would-be lessee to check the exact terms of the contract and which expenses he or she will be responsible for.
What should tenants know about Triple Net commercial leases?
Potential tenants should keep in mind that Triple Net commercial leases typically benefit the landlords. It is particularly popular among investors. It is an excellent way for them to create a steady and predictable income stream. As you undoubtedly know, the cost of property taxes and building insurance tend to fluctuate from year to year, which can make it complicated for investors to predict their income.
However, with an NNN lease, this uncertainty is left to the tenant. When negotiating the terms of the contract, you should always remember that property taxes tend to augment year after year. It is particularly important since NNN lease are typically negotiated on a long-term basis – ten years or more.
The tenant should also look out for the terms of the leases. They should particularly be mindful of how the expenses are calculated. If the overhead costs are prorated among several tenants, you should check and see if it is established based upon leasable space or occupied space. If part of the building is vacant, you could be responsible for a more significant percentage of the expenses.
On the positive side, the base rent is typically lower than it would be for other types of commercial leases. Always negotiate carefully, do your research, and don’t hesitate to seek advice from your accounting services before signing the dotted line.