Decoding the Triple Net Lease: A Guide for Commercial Tenants
When leasing commercial office space in the United States, you'll likely encounter the term "triple net lease" or "NNN lease." This type of lease structure is common in commercial real estate leases and is typically seen in retail and industrial properties and sometimes in single-tenant or standalone office buildings. Understanding how a triple net lease works is crucial for tenants to make informed decisions and avoid unexpected costs.
What is a Triple Net Lease?
In a triple net lease, the tenant is responsible for paying not only the base rent but also three additional categories of expenses:
- Property Taxes (N): These are taxes levied on the property by the local government.
- Insurance (N): This includes building insurance that covers potential damages or losses to the property. Note, this does not include a tenant's personal property insurance.
- Janitorial, Utility and Common Area Maintenance (CAM) (N): The tenant is also responsible for paying for water and electricity charges, as well as CAMs, which are the costs associated with maintaining the property such as lobbies, hallways, elevators, landscaping, and parking lots.
Essentially, the landlord passes on these operating expenses to the tenant, resulting in a lower base rent compared to other lease structures, therefore this must be taken into consideration when evaluating properties with different lease structures such as fully-serviced (FS) or industrial (or modified) gross (IG/MG).
How Does a Triple Net Lease Work in Practice?
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Base Rent: The tenant pays a fixed monthly or annual base rent to the landlord. This amount is typically lower than in a gross lease (ex. fully-serviced) where the landlord covers operating expenses.
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NNN Expenses: The tenant is also responsible for paying their share of the property taxes, insurance, and CAM charges. These expenses can be paid in a few ways:
- Pro-rata share: The tenant pays a proportionate share of the actual expenses based on their occupied square footage compared to the total leasable area of the building.
- Estimated payments: The landlord estimates the NNN expenses for the year, and the tenant pays a monthly or quarterly estimated amount. At the end of the year, there's a reconciliation process where the tenant either receives a credit or pays the difference based on actual expenses.
- Direct payment: In some cases, the tenant may pay certain expenses, like property taxes, directly to the relevant authority. This is most common in single-tenant or stand alone buildings.
Advantages:
- Transparency: Since all of the expenses of the building are "netted out" and not captured within a "grossed up" structure such as fully-serviced, the tenant has full transparency into the costs without having to request them from the landlord.
- More control: Tenants have more control over operating expenses and can potentially implement cost-saving measures in areas like energy and water efficiencies.
- Predictable expenses: With a well-structured lease, NNN expenses can be relatively predictable, allowing for better budgeting.
Important Considerations for Tenants
- Negotiate clearly defined terms: The lease should clearly outline how NNN expenses are calculated, paid, and reconciled.
- Review historical expense data: Requesting past expense data from the landlord can help you estimate future costs and avoid surprises.
- Understand CAM charges: Scrutinize the definition of CAM charges in the lease to ensure they are reasonable and justifiable.
- Consider caps or escalations: Negotiate caps on how much NNN expenses can increase annually or explore fixed-rate options for certain expenses.
- Consult with professionals: Seek advice from a real estate attorney and financial advisor to fully understand the implications of a triple net lease and ensure it aligns with your business needs.
In Conclusion
Triple net leases can be a viable option for commercial office tenants, offering potential cost savings and greater control over operating expenses. However, it's crucial to carefully analyze the lease terms, understand the associated risks, and consult with professionals to make an informed decision. By doing so, you can ensure a lease agreement that benefits your business and provides long-term financial stability.