The NNN or Triple Net Commercial Lease

There are a number of structures for commercial leases, one being the NNN lease.  The acronym is for Triple Net.  It is unlike a gross lease in which the tenant pays the monthly rent and the landlord pays all other costs associated with ownership and care of the property.  The NNN lease is set up with the tenant paying all costs associated with the property.  The “triple part” indicating:

  • property taxes;
  • insurance; and
  • property maintenance.

The NNN lease is more commonly used for retail space.  Let’s break out the three “N”s and the pros and cons of each for the tenant and the landlord.

  • Property Taxes:  the tenant would be responsible for paying the property taxes each year whendue.
    • Tenant:  this is a minor inconvenience, accepting the mailed tax notice from the landlord and sending in amounts when due.  However, because the tenant is locked into this lease, ever-hungry municipalities can keep raising taxes to fund careless spending.
    • Landlord:  the landlord needs to be concerned about the tenant paying taxes on time, as penalties and interest can be severe.  Getting notices of unpaid taxes, sometimes accompanied by a lien on the property, is something the landlord doesn’t want to experience.
  • Insurance:  the tenant pays all insurance, their own for operations and liability, plus liability and property damage for the facility.
    • Tenant:  generally the tenant must pay deductibles on claims, as well as pay for any uninsured damages.
    • Landlord:  the landlord needs to be aware of coverage levels and on-time payments.  Tenants can skimp on coverage in order to save money, and the landlord could ultimately suffer if the property is not fully repaired after a claim.
  • Property Maintenance:  this would include janitorial, landscaping, and all repairs.
    • Tenant:  with a new property, this can be a favorable situation.  With older properties the repair bills can be excessive, and the tenant often has no history which they can use to develop a risk profile.
    • Landlord:  the landlord must be concerned with the tenant deferring maintenance that could bite the landlord later.  Also, the tenant can cut costs with sub-standard repairs that could result in greater damage after they’re long gone.

Example Triple Net Lease

Let’s use Olivia’s Clothing Boutique as our example retail company entering into a triple net lease with the landlord for their free-standing building.  Here are the basic terms:

  • Base Rent:  this is lower due to the NNN structure, set at $1,000/month.
  • NNN:  tenant pays all taxes, maintenance and insurance costs.
  • Rent is automatically escalated for inflation by 4% per year, and the lease is for 5 years.

So, here are the current numbers:

  • Base rent of $1,000/month +
  • Taxes this year of $4,800, or $400/month
  • Maintenance variable, but last year came to $3,600, or $300/month.
  • Total monthly is $1,700/month.

Next year the rent will increase by 4%, or $40/month.  As governments do, they assess property values annually for commercial property.  The second year the property was valued higher, and taxes rose by $50/month, or $600.  There was a compressor failure in the heat pump system, which brought annual maintenance up to $4,800.  So, the second year’s rent would be:

  • Base of $1,040/month (with inflation factor) +
  • Maintenance now breaks out to $400/month +
  • Taxes rose by $50/month to 450/month +
  • New monthly rent amount for year 2 is $1,890/month.

This could be perfectly fine with both tenant and landlord.  However, now you know how the NNN or triple net lease works, so you can make some intelligent decisions about entering into your next commercial lease.

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