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.

What is the Difference Between Net Lease & Gross Lease?

It is easy to get confused with all of the commercial real estate lingo out there.  Two such examples are Net Lease and Gross Lease.  Understanding the differences between the two can equate to a substantial savings when negotiating commercial real estate lease terms.

Gross Lease

A gross lease is an agreement whereby the Tenant pays a fixed rental rate and the Landlord pays all of the operating expenses.  This means that the Landlord pays expenses such as insurance, real estate taxes, utilities and common area maintenance (CAM).  The Tenant would then be responsible for the rent and any specific business-oriented expenses.  Due to the Landlord assuming inflation risks by allowing the Tenant to pay a fixed sum every month, many commercial real estate landlords have abandoned the gross lease – with the exception of some smaller office leases.

Net Lease

In a net lease, the Tenant pays rent, plus a portion of expenses associated with the building being rented.  The expenses may include insurance, real estate taxes, utilities and common area maintenance.  There are basically three categories of a net lease.  They are single, double and triple net.  These types of leases put the burden of increasing expenses on the Tenant and remove them from the Landlord.

Single Net Lease

A single net lease is an agreement in which the tenant pays the rent and certain expenses.  In this situation, the Tenant is usually expected to pay all or part of the property taxes in addition to the rent.  This type of lease is more common in older buildings with shared utilities.

Double Net Lease

With a double net lease, the Landlord is responsible for structural repairs to a building, while the Tenant is responsible for taxes, building insurance, utilities and maintenance costs.

Triple Net Lease

A triple net lease is an agreement in which the tenant pays for maintenance, operating expenses, taxes and insurance.  In this situation, the Tenant is responsible for repair and maintenance of any common areas.  This form of net lease is typically used with freestanding buildings and multi-unit structures where multiple Tenants share the maintenance costs of the common areas.

Conclusion

While Tenants may perceive the best deal is to go with a gross lease, this is not always the case.  The terms and price of the lease agreement can affect the overall  value of the lease arrangement.  For example:

If the average gross lease in your area is $18.00 per square foot, while a net lease is calculated at $12.00 per square foot and expenses calculated at an additional $4.00 per square foot, the next lease in this instance will save the Tenant about $2.00 per square foot over the gross lease.  This savings needs to be weighed carefully against variable expenses and any potential increases that may go along with them.

Are you looking for representation in negotiating either a gross or net lease?  If so, let Rodney McNabb w/MainStreet Realty Services assist in weighing the costs and potential risks for you.  You can contact him via email at Rodney(at)MainStreet-Realty.net or by calling (919) 322-3960 ext. 7