All this makes understanding the terms and conditions of a lease agreement even more vital. One of the most common lease structures you will see is called a triple net lease or NNN. As you can probably imagine, this has a substantial effect on the overall cost of leasing the property. In this blog, we will explain exactly what these terms mean, how they affect both the tenant and the landlord, and how a triple net lease can give you more bargaining power in lease negotiations.
Since evaluating leases can be daunting even for seasoned professionals, the best thing you can do to prepare yourself is to understand the different types of lease structures along with the benefits and obligations that accompany them.
First and foremost, you should always hire a qualified real estate attorney to represent you in reviewing any lease or purchase contract. If you are signing a legally binding document that is drafted by an opposing party, it needs to be properly reviewed and explained to you. Those clauses affect how much you are going to pay for base rent and what other obligations or expenses get charged to you in the future, such as property taxes, insurance, and common area maintenance costs.
Understanding this will help you properly evaluate all your options so you can confidently move forward with a particular property. Those expenses include repairs and maintenance costs, trash removal, snow removal, landscaping, parking lot maintenance, security and fire safety, elevator maintenance, property management, exterior lighting and more. Depending on the property, utilities and janitorial may also be included in the Operating Expenses or CAM.
With a Triple Net Lease, you typically pay the landlord one check per month, but that check is broken down into two main categories:. Both your base rental costs and your triple net lease expenses are calculated on the square footage of the property that you occupy and lease. Triple Net leases are the most common type of lease you will find in retail properties, newer medical office buildings, hospital campuses, and the majority of traditional office buildings. Triple Net Leases are popular for a number of reasons.
Let us help you navigate this asset class by signing up for our comprehensive real estate investing guide. If you're new to the world of commercial real estate , you may be wondering, "What does NNN mean? Keep reading to learn what the term "NNN" means in a commercial context, how this type of commercial lease is different from other lease agreements, and what the benefits are to leasing a triple net property.
In real estate, "NNN" is an abbreviation for the phrase " triple net lease. With a triple net lease, these operating expenses tend to fall into three separate categories, or "nets. In this case, although the lessee will only write one check to the landlord, their monthly rent is typically broken down into two distinct components: the base rent and the NNN charge.
Base rent refers to the stated monthly rent on a commercial lease. It's also the minimum amount that the tenant will be charged in rent each month. Meanwhile, NNN costs are an additional charge meant to cover the three types of fees listed above.
In a commercial lease, both the base rent and any NNN expenses are calculated using a flat cost per square foot. Although the triple net lease is a common lease structure, it's only one type of commercial real estate lease. To help make creating a lease agreement easier, we've briefly outlined the other types of commercial leases for you below.
Read them over to get a better sense of what type of lease might be the best bet for your investment property. Also known as a "full-service lease," a gross lease simply charges the tenant base rent. With this type of lease, the landlord agrees to cover nearly every operating expense necessary to run the building, including maintenance fees, property taxes, and building insurance. A modified gross lease is a middle ground between net leases and gross leases.
Here, the tenant usually agrees to pay a base rental rate, utilities, and a portion of their NNN costs. The details of what is paid by each party will vary according to the individual lease, but typically the tenant's NNN charge is based on the percentage of the building that they occupy.
An "N lease" is also known as a "single net lease. Here, the landlord is responsible for paying the property insurance as well as any operating expense for the entirety of the lease term.
As you might be able to guess, an "NN lease" is also known as a " double net lease. In an absolute NNN lease, the tenant is responsible for all of the costs associated with the upkeep and operation of the building, including major repairs. This type of commercial lease is not very common and is usually only used in situations where there is a single tenant who has excellent credit and a well-established portfolio.
Notably, the base rent for an absolute net lease is usually much lower to account for all the added costs the tenant has to manage. Percentage leases work slightly differently than the other types of commercial leases. With a percentage lease, the tenant is expected to pay the landlord a certain percentage of their business sales in addition to their base rent.
Usually, large retail spaces, such as malls and shopping centers, are the main type of business to use this type of lease. The biggest benefit of a triple net lease for the property owner is that you take on less financial responsibility. Is one better than the other? An NNN lease is the most common type of commercial lease and is commonly called a triple net lease.
On an NNN lease, tenants pay additional expenses in addition to the lease fee, to the landlord or lessor. How is this figured? The landlord uses the amount of annual costs and divides it by the total number of rental square footage in the building. The landlord includes the totals for property taxes, insurance, maintenance and common area upkeep and then divides the sum by 12 to arrive at a monthly cost. So, what is gross lease? Gross rate or full-service rate includes everything; taxes, insurance, maintenance, in the total lease rate.
This means you will pay one lump sum for rent, from which the landlord pays his expenses. On the gross lease, the landlord pays all or most expenses associated with the property.
This includes taxes, insurance, and common area maintenance out of the rents received from tenants and could also include the utilities and janitorial services.
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