Triple-Net (NNN) lease offers several advantages in terms of cost predictability and property control, but they also come with significant financial responsibilities. You can make the most of NNN commercial lease and mitigate potential risks by being well-informed and prepared. If you are considering such an arrangement, you should conduct due diligence with help from an experienced real estate attorney.
What is a Triple-Net Commercial Lease?
In NNN commercial leases, the tenant is responsible for paying not only the base rent but also the net costs associated with the property, including property taxes, insurance, and maintenance expenses. These are a few key components of a Triple-Net Lease:
- Base Rent: The tenant pays a fixed base rent to the landlord, typically on a monthly basis.
- Property Taxes: The tenant is responsible for paying a portion of the property taxes associated with the leased space.
- Property Insurance: The tenant is required to cover the cost of insurance for the property.
- Common Area Maintenance (CAM): This includes expenses for maintaining and repairing common areas of the property, such as parking lots, landscaping, and shared facilities. Tenants are often charged a share of these costs.
Triple-Net Leases are common in commercial real estate, especially for properties like retail stores, office spaces, and industrial facilities. They shift a significant portion of the property’s operating expenses to the tenant, making it important to thoroughly understand the terms and associated costs before entering into such an agreement.
Difference Between Triple-Net Commercial Lease and Gross Commercial Lease
As a tenant, you will be responsible for not only paying the base rent but also the “net” costs, which include property taxes, property insurance, and common area maintenance (CAM) expenses in a NNN lease.
With that said, in a Gross Lease, landlords take on the responsibility for covering all property-related costs, such as property taxes, insurance, and maintenance. You would only need to pay a fixed, all-inclusive rent amount without being directly responsible for these expenses.
NNN leases can result in less predictable costs for you. This is because the tenant bears the burden of various property expenses, which may fluctuate from year to year. For example, if property taxes increase, you will need to absorb that additional cost.
Gross leases offer tenants greater cost predictability. Since tenants pay a fixed rent amount that includes all property expenses, they don’t need to be concerned about fluctuations in operating costs.
Control and Responsibilities
NNN leases will lend you a greater control over property maintenance and operational decisions. Tenants are often more directly involved in property management and maintenance, and can make decisions about repairs, landscaping, and other aspects of property upkeep.
Landlords typically retain more control over property maintenance and management responsibilities in a Gross Lease. They are responsible for coordinating repairs, handling property taxes and insurance, and making decisions about the property’s upkeep.
Benefits of NNN Commercial Lease for Tenants
Triple-Net (NNN) commercial leases can be beneficial for tenants in several ways, depending on your specific business needs and financial circumstances:
- Cost Transparency: NNN leases often provide transparency in costs. Since tenants are responsible for property expenses like taxes, insurance, and maintenance, you will have a clear understanding of your financial obligations beyond the base rent.
- Control Over Property: NNN leases give tenants a higher degree of control over the property’s maintenance and operation. You can make decisions about property upkeep, which can be valuable if your business has specific needs.
- Lower Base Rent: In many cases, the base rent in NNN leases is lower compared to gross leases, where the landlord covers all expenses.
- Property-Specific Expenses: NNN leases can be attractive for businesses that want to take on property-specific expenses. For instance, a retail business might want to invest in maintaining the appearance of its storefront.
Things to Consider Before Signing a NNN Commercial Lease
These are a few aspects to consider before signing your lease:
Property taxes are a significant component of NNN lease expenses. These taxes are assessed by local governments and can vary from year to year based on the assessed property value and changes in local tax rates.
Property insurance costs can differ based on factors such as the type and amount of coverage needed, the property’s location, and insurance market conditions. Changes in insurance premiums can lead to fluctuations in NNN expenses.
Maintenance and Repairs
Common Area Maintenance (CAM) expenses, which include maintenance and repairs for shared areas of the property, can also vary. These costs depend on the condition of the property, the need for repairs or upgrades, and the decisions made by the property owner or property management.
In a NNN lease, tenants often have control over property maintenance and operational decisions. This can lead to variability in expenses as tenants may choose to invest in maintenance or upgrades to meet their specific business needs.
To manage the variability in costs, tenants in triple-net leases should:
- Thoroughly review the lease agreement to understand the specific expense-sharing arrangements.
- Budget for potential cost fluctuations, especially in the property tax and CAM categories.
- Communicate and negotiate with the landlord to establish clear expectations for cost increases or property improvements.
Choose a Knowledgeable Real Estate Lawyer to Protect Your Rights
The attorneys at Johannesmeyer & Sawyer, PLLC specialize in all aspects of real estate law, from residential transactions to complex commercial deals. We know the ins and outs of zoning regulations, property taxes, and other local factors that can impact your real estate ventures. To schedule your free consultation, call us at (844) 843-1589 or fill out this online contact form.