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Triple net leases are a unique arrangement for commercial property owners and tenants. In this case, tenants contribute to maintenance costs and negotiate rent separately from the operation costs. This can lead to lower rent costs and the ability to personalize their spaces. In short, it is a win-win for both parties in specific situations.
In the post below, we discuss what you should know about triple net leases:
What is a Triple Net Lease?
Triple net leases, also called NNN leases, are legal contracts between a lessor and a lessee. In the agreement, the lessee tenant pays rent and a pro-rata share of operating costs, including taxes, insurance, and common area maintenance (CAM). A NNN lease is most commonly used for commercial real estate transactions, but can also be used for residential properties, such as single-family homes or apartment buildings.
What’s Included in a Triple Net Lease?
The various clauses in a triple net lease are complicated. It is essential that you understand what you are signing or offering. This strategy can make the difference between a space and agreement that meets your specific needs and one that quickly becomes restrictive.
The following contractual provisions are typically included in a triple net lease:
Property Use
A use clause specifies how a tenant may use the leased space. It is critical to ensure that the terms are consistent with the tenant’s operations. Otherwise, this situation can result in early termination or bad faith disputes between the lessor and lessee.
Lease Term
A term clause in a triple net lease specifies the lease’s duration and includes the commencement date, expiration date, and, in some cases, any renewal options. Before signing, it is in your best interest to take a realistic look ahead to determine the space’s future viability concerning the company’s anticipated growth.
Rent Amount
A rent clause may include factors other than the amount due each month or quarter. Automatic rent increase mechanisms, for example, could be included in a rent clause, which could have a significant impact on the tenant’s financials over the lease’s term.
Pro-Rata Operating Costs
In a triple net lease, tenants pay extraneous expenses to the landlord or lessor in addition to rent. The pro-rata operating costs cover the building’s property taxes, insurance, and common area maintenance. Typically, the landlord will calculate payments based on a division of annual expenses and total rental square footage in the building.
Here is an article that goes further into triple net leases.
How Triple Net Leases Work
A triple net lease works by a commercial property owner leasing a building or space to a tenant. However, instead of including all taxes, insurance, and common area maintenance (CAM) in the rent amount, the tenant pays an equal portion based on square footage. This outcome contrasts traditional commercial lease agreements where the landlord is either responsible for these costs or passes them along to tenants at a higher rate and with fewer options.
Common Area Maintenance
Common area maintenance, or CAM, is a “catch-all” term that refers to other operating costs beyond insurance and taxes.
Examples of CAM costs include the following:
- HVAC
- Landscaping & lawn maintenance
- Maintenance of the exterior
- Parking garages and lots
- Roofing
- Security features
- Signage
- Snow removal
- Utilities
How you choose to structure your agreements depends on several factors, including geographic region, industry, building size, building use, and more. You should seek legal help if you need advice when drafting this type of agreement.
Triple Net Lease Examples
If you are still confused by how triple net lease agreements work, you are not alone. The complicated terms and conditions often leave tenants and landlords mystified. However, reviewing an example can help you solidify your understanding.
Here is an in-depth example of how a triple net lease works:
- Brightline Inc. rents commercial offices to professional service providers
- The company offers triple net leases to prospective tenants
- The company has a 14,000 square foot building divided into individual offices, common areas, reception, break rooms, bathrooms, and office suites
- The building can lease up to twenty units
- The company spends $100,000 annually on taxes, insurance, and CAM
- Startup Co. wants to rent office space from Brightline, Inc. on a triple net lease agreement
- Startup Co. intends to rent a small 500 square-foot office space
- Brightline Inc. asks Startup Co. to pay $1,000 per month in rent
- Brightline Inc. must also calculate the cost of insurance, taxes, and CAM
- Brightline Inc. determines that it costs $7.14 per square per year foot to maintain the property
- Startup Co. must pay $297.50 per month for insurance, taxes, and CAM based on the preceding calculation
- Startup Co.’s total monthly rent due on a triple net lease agreement is $1,297.50 per month or $15,570 per year
As you can see, there is a bit of math and valuation involved. Landlords will also need to predictably estimate property taxes, insurance premiums, and utility costs. Otherwise, the arrangement can quickly turn into a widening gap of opportunity costs.
Image via Pexels by Guillaume
Other Types of Commercial Leases
Although triple net leases are frequently used in commercial real estate, they are not the only type of lease. There are numerous lease types, and each has a slightly different definition depending upon the perspective of the professional and industry.
In addition to triple net leases, the other types of commercial leases include the following:
Type 1. Net Leases
Under a net lease, the tenant may be required to pay a portion of the taxes based on a percentage of the building, but not maintenance or insurance costs. This lease type contrasts triple net since the latter requires insurance and maintenance costs.
Type 2. Absolute Leases
The tenant is responsible for paying for everything and may even be responsible for maintaining everything under an absolute lease. If the roof begins to leak, the tenant may be required to contact their roofer and make repairs, for example.
Type 3. Modified Gross Leases
A modified gross lease includes expenses paid by both the tenant and the landlord. Typically, the landlord pays taxes and insurance, but the tenant is still responsible for office expenses such as janitorial services.
The tenant or the landlord may both be responsible for paying the utilities. There are numerous ways to divide costs, but modified gross rent is typically higher under this arrangement than with a triple net lease to compensate for the landlord’s additional expenses.
Type 4. Gross Leases
Gross leases are when the landlord covers all costs, including taxes, insurance, maintenance, utilities, and even janitorial service. The tenant is only responsible for rent, which is typically significantly higher on a gross lease than on a triple net lease.
Here is an article that goes further into the types of commercial leases.
When is a triple net lease a good idea?
A triple net lease is a good idea when landlords want a reliable source of income with lower overhead costs. At the same time, tenants receive the benefit of customizing their units and achieving brand consistency. Another advantage is that these leases are frequently quite flexible in terms of tax and insurance increases. Additionally, the landlord is not required to be actively involved in the property’s management.
Get Help With a Triple Net Leases
Landlords and tenants alike can offset a commercial retail, manufacturing, or office space lease cost. However, triple net lease terms and conditions must be consistent with your intent and current market conditions. Get help with triple net leases by employing the services of real estate lawyers.
Meet some of our Triple Net Lease Lawyers
Ryenne S.
My name is Ryenne Shaw and I help business owners build businesses that operate as assets instead of liabilities, increase in value over time and build wealth. My areas of expertise include corporate formation and business structure, contract law, employment/labor law, business risk and compliance and intellectual property. I also serve as outside general counsel to several businesses across various industries nationally. I spent most of my early legal career assisting C.E.O.s, General Counsel, and in-house legal counsel of both large and smaller corporations in minimizing liability, protecting business assets and maximizing profits. While working with many of these entities, I realized that smaller entities are often underserved. I saw that smaller business owners weren’t receiving the same level of legal support larger corporations relied upon to grow and sustain. I knew this was a major contributor to the ceiling that most small businesses hit before they’ve even scratched the surface of their potential. And I knew at that moment that all of this lack of knowledge and support was creating a huge wealth gap. After over ten years of legal experience, I started my law firm to provide the legal support small to mid-sized business owners and entrepreneurs need to grow and protect their brands, businesses, and assets. I have a passion for helping small to mid-sized businesses and startups grow into wealth-building assets by leveraging the same legal strategies large corporations have used for years to create real wealth. I enjoy connecting with my clients, learning about their visions and identifying ways to protect and maximize the reach, value and impact of their businesses. I am a strong legal writer with extensive litigation experience, including both federal and state (and administratively), which brings another element to every contract I prepare and the overall counsel and value I provide. Some of my recent projects include: - Negotiating & Drafting Commercial Lease Agreements - Drafting Trademark Licensing Agreements - Drafting Ambassador and Influencer Agreements - Drafting Collaboration Agreements - Drafting Service Agreements for service-providers, coaches and consultants - Drafting Master Service Agreements and SOWs - Drafting Terms of Service and Privacy Policies - Preparing policies and procedures for businesses in highly regulated industries - Drafting Employee Handbooks, Standard Operations and Procedures (SOPs) manuals, employment agreements - Creating Employer-employee infrastructure to ensure business compliance with employment and labor laws - Drafting Independent Contractor Agreements and Non-Disclosure/Non-Competition/Non-Solicitation Agreements - Conducting Federal Trademark Searches and filing trademark applications - Preparing Trademark Opinion Letters after conducting appropriate legal research - Drafting Letters of Opinion for Small Business Loans - Drafting and Responding to Cease and Desist Letters I service clients throughout the United States across a broad range of industries.
Rebecca R.
An experienced commercial contracts attorney with sales, leasing, NDA, SEC compliance, corporate governance, commercial real estate, and employment experience. Also well versed in internal and external policy document and manual creation.
Jeremiah C.
Creative, results driven business & technology executive with 24 years of experience (15+ as a business/corporate lawyer). A problem solver with a passion for business, technology, and law. I bring a thorough understanding of the intersection of the law and business needs to any endeavor, having founded multiple startups myself with successful exits. I provide professional business and legal consulting. Throughout my career I've represented a number large corporations (including some of the top Fortune 500 companies) but the vast majority of my clients these days are startups and small businesses. Having represented hundreds of successful crowdfunded startups, I'm one of the most well known attorneys for startups seeking CF funds. I hold a Juris Doctor degree with a focus on Business/Corporate Law, a Master of Business Administration degree in Entrepreneurship, A Master of Education degree and dual Bachelor of Science degrees. I look forward to working with any parties that have a need for my skill sets.
Antonella C.
I am a business transactional & trademark attorney with 15 years experience in the law firm and in-house settings. I am barred in Pennsylvania and New Jersey. I currently own my own practice serving businesses and entrepreneurs with business transactional and IP law.
August 14, 2023
Jacob W.
Background in Engineering, Masters in Business, Licensed Patent Attorney. Reviewed countless title reports, and land contracts. If you have a problem with Real Estate I can solve it.
September 2, 2023
Jeffrey J.
I have been in business development for 15 years before becoming an attorney. As an attorney, I help companies navigate legal challenges that they face.
August 15, 2023
Anthony V.
Anthony M. Verna III, is the managing partner at Verna Law, P.C. With a strong focus on Trademark, Copyright, Domain Names, Entertainment, and Advertising law, Verna Law, P.C. strives to provide all Intellectual Property services a modern business of any size may need to market and promote itself better. From the very early concept stage, Verna Law, P.C. can conduct a comprehensive, all-encompassing search and analysis on any proposed trademark to head off complications. Once the proposed concept enters the Alpha stage, Verna Law, P.C. can seamlessly switch to handling registration, protection, and if needed, defense of registered trademarks, copyrights, and domain names, as well as prosecution of entities violating said rights. Verna Law, P.C. also provides intellectual property counseling and services tailored to fit into your business’ comprehensive growth strategy. This shows as many of Verna Law, P.C.’s clients are international: from China, the United Kingdom, Canada, and Germany, Verna Law’s reach is worldwide. Additionally, Verna Law, P.C., can handle your business’ Entertainment and Advertising law needs by helping your business create advertising and promotions that keep competitors and regulators at bay. Located in the shadow of New York City, Verna Law, P.C. has a global reach that will provide clients with the most vigorous Intellectual Property advocate available. Anthony M. Verna III is a member of the New York and New Jersey Bars, as well as the U.S. District Court Southern District of New York. He is a sought-after business speaker, including regular appearances at the World Board Gaming Championships, Business Marketing Association of New Jersey, and Columbian Lawyers Association.
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19 unit / 2 property master lease agreement
Location: Ohio
Turnaround: Less than a week
Service: Drafting
Doc Type: Triple Net Lease
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Bid Range: $1,995 - $2,000
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Review commercial Ground lease
Location: Tennessee
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Service: Contract Review
Doc Type: Triple Net Lease
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Bid Range: $525 - $1,000
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