Triple net leases help a commercial tenant and landlord form a long-term, symbiotic business relationship. In exchange for cheaper base rents, tenants pay for building operating costs while landlords tackle significant structural damage.
The article below dives into triple net leases, how they work, and what terms yours should include for protecting your legal rights, property, and financial interests.
What is a Triple Net Lease?
A triple net lease , also called NNN leases, is a legal contract between commercial tenants and landlords. Under triple net leases, the tenant pays for the property’s taxes, insurance, and maintenance in addition to the rental rate. The property owner covers structural damage and mortgage payments.
Examples of businesses that use triple net leases include:
- Industrial companies
- Offices
- Restaurants
- Retailers
- Service providers
The term length of an NNN building lease or office space lease typically ranges between 10 and 25 years. As such, both parties will want to carefully pre-screen each other before committing to the terms since they last long-term. They should also have separate legal counsel review the triple net lease to ensure fair, legal, and reasonable terms.
This web page also discusses triple net leases.
How Does a Triple Net Lease Work?
A triple net lease requires a commercial tenant to pay the property owner a fixed monthly rental payment to use a property as its principal place of business. In a triple net lease, the tenant is responsible for all aspects of the property specified in the terms and conditions .
Commercial tenants usually pay for:
- Insurance
- Liability claims
- Maintenance
- Renovations
- Repairs
- Taxes
However, tenants are only responsible for the portion according to the percentage of the property used. They must also have an exceptional credit profile and a proven track record of success in the industry to secure a triple net lease. It’s common for commercial landlords to pre-screen potential tenants stringently since these relationships last long-term.
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Why Would You Want a Triple Net Lease?
Triple net leases benefit both parties. Commercial tenants want a triple net lease for the lower base lease price, and commercial landlords benefit from someone else paying operating and maintenance expenses, or at least a portion of these expenses. The longer rental term lengths also create security and sustainability that attracts profitable industries and ventures.
Let’s look at how triple net leases compare to other types of commercial lease agreements:
Gross Lease vs. Net Lease
Gross leases vs. net leases are opposite from one another in terms of operating expenses. A net lease requires the tenant to bear some or all of the property’s costs, such as utilities, maintenance, insurance, and more. A gross lease requires a tenant to pay a single lump sum of rent from which the landlord deducts expense payments.
A gross lease generally represents the highest overall profit potential for a landlord. The landlord assumes all risk associated with variable expenses on an office lease , and they typically charge tenants more than a comparable net leasing arrangement would, even after factoring in operating and maintenance costs.
Here is an article that also discusses net leases.
Gross Lease vs. Triple Net Lease
Triple net leases provide special protections for both the landlord and the tenant. Landlords are protected if operating costs (the NNNs) increase, as those costs are passed directly on to the tenants who benefit from the site’s use. Additionally, tenants can audit maintenance expenses to ensure that common areas are properly maintained and do not exceed the budget.
Gross leases have several advantages and disadvantages for both landlords and tenants. Landlords only need to quote is a single rate, which is relatively simple for tenants to manage. Tenants, however, cannot audit expenses, which means a landlord can cut corners to increase profit.
Both leases are suitable for various leasing scenarios, depending on the landlord’s and tenant’s sophistication, the type of property, and the investor’s strategy. It is prudent to consult with your attorney to determine the best structure for you and your business.
What Does the Landlord Pay in a Triple Net Lease?
A triple net lease passes many significant operating and maintenance expenses on to the tenant. However, they don’t cover all costs, and the owner is responsible for making mortgage payments and making structural repairs to electrical systems, exterior walls, HVAC systems, plumbing systems, and roofs as needed.
Property owners retain all equity under a triple net building lease, even if the tenant makes approved upgrades and improvements. Ensure that you address what you’re willing to allow and cover if you’re the property owner.
For more information about commercial properties, check out this web page .
What’s Included in a Triple Net Lease?
Investors seeking a steady cash flow from rental payments prefer triple net leases. The advantage is that the tenant typically bears most of the property’s operating costs, making it a high-reward, low-risk investment with a predictable monthly income for the property owner. Understanding the terms of a NNN building lease agreement ensures that you’re aware of your responsibilities.
Here are a few terms and conditions to include in your triple net lease agreement:
Term 1. Rental Rate
Landlords rely on monthly rental payments to supplement their income, which means it’s critical to understand the amount agreed upon in the agreement and whether it will change over time. NNN agreements include fixed payments for the duration of the lease to ensure that you know exactly how to expect from your tenant every month or quarter.
However, rent increases are integrated into the agreement and often occur regularly throughout the lease term to reflect rising property values or anticipated growth in the area.
Term 2. Taxes
A triple net leasing agreement also specifies tax obligations, and property taxes are the tenant’s responsibility under this arrangement. Every agreement is unique, so you will want to clarify this section to avoid future fines and penalties for non-payment of taxes. Non-payment of taxes could even result in criminal charges.
Term 3. Insurance
The tenant is responsible for insurance premiums under a triple net leasing agreement. However, there is a much more significant variation of opinion on this term from contract to contract. For example, some property owners require the tenant to obtain and maintain the necessary triple net insurance policies, and others may include provisions for separate insurance policies and obligations.
Term 4. Maintenance
Ongoing maintenance costs are another component of a NNN lease. While net lease renters are responsible for most operating expenses, each contract will specify how both parties divide certain maintenance costs. For instance, the tenant may be responsible for general upkeep while the landlord pays for more significant structural repairs.
Term 5. Utilities
Tenants also pay for utilities and building cleaning costs, though some landlords share them with tenants. They can also deduct monthly expenses incurred from revenues. Again, how you handle utilities ultimately depends upon the building, tenant, industry, and other relevant factors.
Get Legal Help with Triple Net Leases
A well-written, legally sound triple net lease creates the foundation for a profitable and smooth relationship between tenants and landlords. Real estate lawyers will help draft a document that meets your specific needs. Find a legal professional in your state to learn more or get started today.
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