Understanding Triple Net (NNN) Leases
How to understand Triple Net and Commercial Real Estate Language. As a commercial real estate broker with Commercial Properties, Inc., I get many prospects, tenants and even new brokers trying to understand Triple Net and other Commercial Real Estate terms. To help understand Triple Net, it’s important to know the definition as well as what costs are involved in a basic commercial lease. Wikipedia’s definition of Triple Net:
In commercial real estate, a net lease requires the tenant to pay, in addition to rent, some or all of the property expenses which normally would be paid by the property owner (known as the “landlord” or “lessor”).
Costs associated with most commercial real estate leases can be broken into three areas:
- Base Rent
- Triple Nets
- Electric and Janitorial
Triple net, referred to as a NNN (in a triple net lease), represents the three major net costs:
1. property taxes
2. property insurance
3. common area maintenance (CAM’s) which includes water.
When considering leasing commercial real estate, there three (3) ways you can go into a lease.
1. Triple Net Lease
2. Modified Gross Lease
3. Full Service Lease. I describe each of these in detail below. The words “Triple Net” is used commonly when dealing with commercial real estate because no matter which vehicle is used to take a lease, the landlord has the Triple Net’s to deal with. They are getting paid regardless how you, the tenant, feel about it. Typically the Triple Net’s are a pass through cost that the landlord passes on. These costs are seldom marked up as a profit center for the landlord.
Here is more information on Triple Net:
A triple net lease is one in which the tenant pays all of the ongoing operating expenses. The landlord/owner charges an annual base rate plus a pass through cost of the three major nets. Other costs such as utilities, janitorial, internet, phone, etc. are not included in the lease rent. In its purest form, a NNN Lease is where the tenant manages the property/space, doing everything from paying all the operating expenses, property taxes, utilities, insurance premiums, maintenance and interior repairs.
Here are the Three Main Lease Types:
Triple net lease: A NNN lease requires a tenant to pay a low lease rate while also paying other costs associated with operating and maintaining the space. In fact, with a triple net lease, the landlord will also pass on utility costs that are not separately metered, as well as all costs related to common area maintenance (CAM). These so-called CAM charges include all expenses involved in maintaining common areas such as water/sewer, trash, restrooms, landscaping, parking lots, fire sprinklers, the roof or anything that all tenants share.
Modified Gross/ Modified Full Service Lease: Unlike a triple net lease, this agreement includes one, two or all three of the Nets as part of the base rent. It’s important not to assume what’s included and to ask your commercial broker what part of the nets have been included or modified. Typically a modified gross lease will include all the nets in the base rent.
Full Service Lease: This agreement is where the base rent covers all costs of taxes, insurance, maintenance along with the utilities and janitorial. The tenant pays a pre-determined lease rate each month and there are no pass-through expenses for operating expenses. A pure full service lease is the best of all worlds for a tenant, particularly for a medical office tenant. The tenant only has to write one check per month, and the amount only goes up incrementally over time with the normal progression of rent. Monthly rent typically rises about 3% to 4% per year (although that’s negotiable). The tenant doesn’t have to worry about getting hit later for extra costs such as utilities, and the landlord handles all of the maintenance so the tenant can focus on growing their business.
Benefits of a Triple Net NNN Leases
The nice thing about a triple net lease is the potential savings you could have in the event the costs for the insurance, taxes, or CAM charges were to come down. In this case those savings are passed on to the tenant. Likewise, the downside of a triple net lease is that if expenses go up, those expenses as well are passed on to the tenant as a higher net cost.
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