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Triple net leases are a unique arrangement for commercial property owners and tenants. Rather than leave maintenance costs up to landlords, tenants help offset these costs in exchange for lower rent 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.
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:
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.
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.
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 Maintenace
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:
- Landscaping & lawn maintenance
- Maintenance of the exterior
- Parking garages and lots
- Security features
- Snow removal
In many cases, property management and accounting costs are the tenants’ responsibility in a NNN lease. 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 .
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