Demystifying the Triple Net Lease for Commercial Tenants
By Nick Chaussee, Sterling CRE Advisor
Looking for a new rental space for your business but feeling confused by the jargon? Sterling Advisor Nick Chaussee breaks it down*.
*This is a general overview of leasing terms. Every lease is unique. The specific circumstances of each lease should be considered individually by a team of CRE and legal representatives.
I work with a lot of tenants who are looking for a new location for their business. Helping businesses find the right space for their unique operation is one of the interesting parts of my job. But, the more leases I facilitate, the more I realize that the commercial real estate world can be perplexing.
When it comes to leases, one of the most confusing concepts is “triple net” (or single net, or double net, or a gross lease – and what’s the difference, anyway?).
What are the types of leases?
A “Gross” lease is fairly straightforward. In a Gross lease, the tenant pays the same amount per square foot each month. That amount is fixed based on the leasing agreement. Usually, these are listed with a price and the word Gross somewhere in the listing. That might look like “$10/SF (Gross).”
In a “Modified Gross” lease, tenants pay a set amount of rent per month and a certain amount of the building’s operating expenses. These additional expenses could include maintenance, utilities, or things like janitorial services.
A Modified Gross lease places most of the burden of things like taxes, insurance, and capital repairs on the landlord. In the listing, this might look like “$10/SF (MG)” or “$10/SF (NN).”
Now – getting to triple net or NNN. Triple net leases place most (and sometimes all) of the operating expenses on the tenant. That means a tenant is paying the price per square foot and all fixed and variable operating expenses. This could include common area maintenance like HVAC, electrical and plumbing, structural repairs, site improvements, Real Estate taxes, property insurance, janitorial fees, and utilities. This list isn’t exhaustive, since each property is unique.
As a result of this unique mix of expenses, there is rarely a straightforward number on a listing for a triple net property. Usually, the price per square foot is listed with (NNN) noted as well. That would look like “$10/SF (NNN).”
Why does it matter?
It is crucial for tenants to account for the additional costs of a triple net lease when budgeting for business expenses. If you simply figure your monthly rent using $10/SF, instead of $10/SF + NNN costs, your monthly rent bill will be larger than you planned for, which eats into the bottom line. For example: $10/SF + NNN. If NNN is $5, that means you pay $15/SF.
NNN costs are likely to change over the years due to increasing taxes and rising cost of things like maintenance and other building services. Property management budgets for the NNN expense of a property will be using historical and current data.
At year end, these accounts are reconciled. If the tenant has overpaid, they will be reimbursed; if the tenant has underpaid, management will ask that they make up the difference.
Why do landlords use NNN leases?
Why would one office or retail space be advertised as a Gross and another be advertised as NNN? Ultimately, it comes down to who bears the risk of increased expenses.
A Gross lease places most of the financial risk on the landlord if taxes, insurance or operating expenses for a building go up. A NNN lease means that more of that risk falls on the tenant. Since the landlord has already taken on a great deal of risk by owning the building, a NNN lease helps the landlord minimize their exposure to operating expense increases.
As a tenant, it’s important to understand what kind of lease you are entering into – and how that impacts your business. The tenant and landlord relationship can be beneficial and supportive, especially when it starts out with a clear mutual understanding of the terms of your agreement.
The most crucial thing to track as an owner, potential tenant, property manager, or interested third party, is to understand who is responsible for what operating and capital expenses. These items should be thoroughly reviewed in every lease.