Ever pondered the intricacies of commercial property leasing, only to find yourself ensnared in a web of jargon?
Among the most buzzed-about terms in the industry is the “Triple Net Lease” or NNN Lease. At first glance, it might seem like just another piece of property parlance, but dig a bit deeper and you’ll uncover a fascinating strategy that shifts responsibilities and reshapes traditional landlord-tenant dynamics.
Whether you’re a property magnate, a budding entrepreneur seeking your first commercial space, or a curious reader, our comprehensive guide to Triple Net Lease promises to shed light on its nuances, benefits, and pitfalls.
What Is a Triple Net Lease (NNN)?
A Triple Net Lease (NNN), commonly used in commercial real estate, refers to a lease agreement in which the tenant agrees to pay all the operating expenses associated with a property in addition to the stipulated rent. “Triple net” stems from the three main expense categories covered by the tenant: property taxes, insurance, and maintenance.
Under an NNN lease, the landlord’s responsibility is generally limited to structural components of the building, such as the roof, foundation, and exterior walls. Conversely, the tenant bears the responsibility for almost all other expenses. This includes, but is not limited to:
- Property Taxes: The tenant pays the real estate taxes on the leased asset.
- Insurance: The tenant covers the insurance premiums for the property, which typically include hazard, casualty, and liability coverage.
- Maintenance: This is perhaps the broadest category and can encompass everything from lawn care to minor repairs and routine upkeep.
What is The Concept of NNN?
The concept of an NNN or Triple Net Lease refers to a commercial leasing agreement where the tenant is responsible for three major categories of expenses in addition to their regular rent.
In essence, the NNN lease shifts the burden of many property ownership expenses from the landlord to the tenant, allowing the landlord to receive a more predictable income without the uncertainties of variable property-related costs.
NNN Lease vs Net Lease
At its core, both the NNN Lease and the Net Lease are about sharing property-related costs between the landlord and the tenant. Here’s a breakdown:
- NNN Lease (Triple Net Lease):
- Tenant pays: Base rent + Property taxes + Building insurance + Maintenance costs
- This is like renting a car and being responsible for everything during the rental period, including fuel, insurance, and any repairs.
- Net Lease (which can be Single, Double, or Triple Net):
- Single Net Lease (N Lease): Tenant pays base rent + Property taxes (only). The landlord covers insurance and maintenance.
- Double Net Lease (NN Lease): Tenant pays base rent + Property taxes + Building insurance. Maintenance is on the landlord.
- Triple Net Lease (NNN Lease): Same as the NNN Lease described above.
- Using the car rental analogy, a Single Net might be like paying for the fuel only, Double Net might be like paying for fuel and insurance, and Triple Net is paying for everything.
In simple terms:
- NNN Lease is where the tenant is covering nearly all the property-related expenses on top of their rent.
- Net Lease can vary, with the tenant taking on a bit less or a bit more responsibility, depending on if it’s Single, Double, or Triple Net.
Triple Net Lease Considerations
Although the triple net lease is a highly favored and prized form of a commercial real estate lease, it might not always work in the landlord’s favor.
Putting the responsibility on the occupant takes the control out of the owner’s hands, and because of that, there are important considerations to be made – by all parties – for every one of the three charges that the tenant will deliver.
- Maintenance – establishing the level of maintenance will set the terms of the lease requirements. If a tenant allows a property to deteriorate, that will decrease the property’s value. This is something that every landlord will need protection from.
- Insurance – Outlying the amount of insurance will be required. Again, if a tenant cheaps out on the insurance, or doesn’t acquire it at all, then the property owner might end up in a lot of trouble should some catastrophe strike.
- Taxes – If an unfair appraisal of the proprietary taxes comes, the landlord can contest it, but since he is not the one paying the bill, he might as well not bother. Likewise, a tenant could leave before taxes are due, and the landlord will be stuck with the bill, so if you’ve ever wondered what does landlord pay in triple net lease – there’s the answer.
Why Do Landlords Prefer Triple Net Leases?
By shifting more charges onto the resident/renter, owners keep the ability to exclude some of the unpredictable costs that usually come with leasing a triple net property.
If the expenses for taxes, insurance, or maintenance go uphill, a landlord understands that he is not the one that has to bother with the cost of the increase. Leases like the NNN lease are a better form of risk management versus full-service leases, and landlords often prefer them over any other option.
Under the triple net lease, the expenses that the landlord would have been paying fall onto the tenant, and along with it come all of the expenses that the landlord was (maybe) trying to avoid.
As a buyer or renter, you have to bear in mind that your real estate costs will be increased, so you have to be sure to negotiate the best terms possible.
How the Triple Net Lease Favors the Tenant
Why even do a triple net lease?
Triple net leases allow you a little bit of your own freedom and choice as a tenant. You will be getting on the costs of taxes, insurance, and maintenance, but the base rent is typically lower.
In the NNN lease, It is also possible that with proper negotiation, the landlord will be ready to take on some of the expenses such as investing in utilities or particular kinds of renovations.
Single-tenant NNN leases offer an additional benefit. Because you are in charge of the insurance and maintenance, this form of a NNN lease could permit you to find the best deals and decide which maintenance responsibilities need fixing.
The terms of the triple net lease will put some restrictions on this freedom, of course, but you are not required to pay whatever the landlord wants in order to cover facility costs.
What if There Are Multiple Tenants?
Now that we have understood what is a triple net lease in a single-tenant building, let’s discuss what happens in a multi-tenant space because not all leased spaces are single-tenant buildings.
If your practice is part of a, for example, medical practice, then there may be several other tenants in the same property.
In cases such as that, it is not helpful to let each person be liable for maintenance, and it’s not possible to let each of them be responsible for taxes or/and insurance.
When multiple tenant’s spaces are leased under triple-net terms the landlord will pay the expenses, but transfer the costs onto each one of his tenants through more expensive rent.
Therefore, in multiple tenant situations, some of the choices and freedoms you had before – do not exist anymore. If you are considering starting your practice in a multiple tenant building, you should pay attention to how the costs are divided, which is defined by the lease.
A contract leased space is more trustworthy, but could still have some obstacles. This is why you, as a new tenant must pay attention to how leased space is determined. If the owner has decided not to rent a space at the current time, that should not count as part of the total sum.
Let’s make a conclusion.
Whether you are leasing a single tenant space or a multiple tenant location, there are a number of considerations to make concerning triple net leases and what is NNN lease impact on your final costs.
The IPG team has experience in handling contract negotiations and we would love to provide you with the best deal possible and further explain what is NNN lease if you feel the need for it.
If you are looking for office space or laboratory space, or even to understand better what NNN lease is, please take the time to check out all our services and browse the rest of the articles to see if there is anything else we can help you with.