What Is a Triple Net (NNN) Lease and What's Included in It?
If you are a renter and would like to rent commercial properties—for example, office space, industrial space, retail space, or food and beverage space—you may notice that landlords provide rental space on a net triple-bottom basis.
Triple Net leases (or NNN) give tenants increased transparency and control over expenses. This type of arrangement is one of many "types of services" usually found in commercial real estate leases. Type of service means how tenants pay expenses related to the occupation of a building, such as utilities, maintenance, taxes, and insurance.
The types of services vary from "full-service" to "triple net," with multiple formats in between. One end of the spectrum is a full-service lease under a comprehensive service structure, a tenant pays a fixed amount to a landlord every month to cover their base rent plus their proportion of the total operating costs of the building. At the other end, there is a triple net.
What Is a Triple Net Lease?
A triple net lease is a form of business real estate lease, where the tenant pays basic rent to the landlord and pays its operating expenses directly to the affected utility and service providers. "N" means "net of" or excludes certain expenditures that generally include utilities, property taxes, building insurance, and maintenance or repairs in common areas of the building. Bona fide triple-net leases are generally executed by tenants occupying an entire building, but they are also executed in multi-tenant buildings. Landlords who execute net triple leases in multi-tenant buildings typically charge utility fees within the building—cleaning and collecting waste, for example—directly and charge tenants a fixed amount to cover the shared costs of taxes, insurance, maintenance, etc. Before proceeding, it is important to point out that there is no typical commercial real estate lease. Each lease is negotiated individually and structured by the needs of each owner and tenant, as well as the specific conditions of each building. The following information is a general outline of the triple net lease.
Triple net rental for multiple and individual tenancies. Triple leases may be performed in multi-tenant or single-tenant buildings. However, in a single-tenant building, the tenant is often responsible not only for the operating costs but also for the costs. Also, capital expenditures are associated with elements such as HVAC, roof, and parking. This often happens when a retailer or restaurant owner signs a long-term lease on a property. To establish and develop a solid regular client, a company can rent premises in a location for decades and improve the building —inside as well as outside, if necessary, and pay only basic rent to the landlord.
It is unlikely that a tenant who shares a property with other tenants will incur capital expenses, their relationship with the building or site may not be as important for their business.
Six Key Elements of a Triple Net Lease
This is a base rent amount that does not include additional costs associated with working in a building, such as utilities, building maintenance, building taxes, etc. The base rent is usually calculated on an annual basis per sq. ft. For example, a tenant living on 2,000 square feet with a base rent of $10 a square foot would pay $20,000 a year in base rent.
This category may include electrical, gas, water, sewage, etc. Usually, if a landlord offers a triple net lease, this is because individual meters are available at the building, which allows the tenant to pay the utility providers directly. If the main meter is the only option, the owner will find a way to spread the costs, as best he can, depending on the usage of each lessee, and such formulas or methodologies should be detailed in the triple net lease.
As would be expected, this includes costs related to concierge services, waste collection, recycling, suction, etc. In common areas and tenant spaces. Renters pay the full cost of cleaning their direct space and a proportionate portion of the cost of cleaning common areas.
Real estate taxes.
Taxes are based on the taxable value of the property and are paid approximately annually. The tenant pays a proportional portion of the property tax on the building, which means that each tenant pays a portion of the total tax bill, depending on the percentage of accommodation they rent. So, if you're a 20,000-square-foot tenant in a 100,000-square-foot building, you're going to pay 20% of the tax bill. Each lessee pays its share to the owner who pays the full amount of the tax to the municipality.
It's an insurance policy owned by the landlord to compensate for claims. Like property taxes, each tenant pays a proportionate portion of the total premiums based on the percentage of the building rented by that tenant. Renters pay their share of premiums to the homeowner who pays the insurer directly.
Common area maintenance costs.
Often referred to as CAM, these are expenditures incurred for the operation and maintenance of common areas in a building, including lobbies, exercise rooms, washrooms, shared boardrooms, elevator lobbies, landscaping, and parking spaces. Expenditures are generally associated with utilities, cleaning, maintenance, and property management. Each lessee pays a proportionate share of the total costs based on the percentage of the building rented by the lessee.
What are the advantages to tenants of a triple net worth tenancy agreement?
Pay your proper share.
The main advantage of a net triple lease is that every tenant in a building pays their fair share of expenses. Expenses are paid directly by the lessee who incurred them, instead of being aggregated and divided among all tenants of a building. This means that a lightweight utility user is not overwhelmed by the expense of a heavy user with whom they share ownership.
When negotiating a triple net lease, make sure you ask for statements detailing several years of operating expenses for the building. Knowing the expenses of the property will allow you to establish a budget for public services, insurance, common areas, etc. Make sure to ask about the non-capital expenses the owner plans to incur. Capital expenditures are the responsibility of the owner and cannot be transferred to renters. However, additional costs for maintenance items, such as cleaning common areas in depth or resurfacing parking lots, may be incurred.
Rents less than the market.
If you carefully negotiate the terms of the triple net lease, keep your daily operating costs down and occupy a building with no unexpected costs. Tenants may be able to pay lower than market rents compared to a user who has a full-service lease on a similar property.
What Are the Tenant Risks of a Triple Net Lease?
If utility costs rise or a tenant spends more than anticipated on direct expenditures, they will pay more than expected to occupy the space. With a full-service lease, the landlord that set expenses at a fixed figure will bear the risks should costs rise.
Property taxes, insurance premiums, and common area maintenance costs are largely beyond the control of the lessee. If one of these expenditures increases because, for example, the appraised value of the building has increased, an accident in the building caused premiums to rise or unexpected repairs to the elevators had to be done, the tenant could be responsible for his share of these expenses.