Triple Net Lease Overview

Tenants looking to lease commercial real property, such as office, industrial or restaurant space, may find landlords that offer triple-net leases. Triple net (or NNN) leases offer tenants greater transparency and control over their expenditures. This agreement is one of many "service types" found in commercial realty leases. Service type refers to the way tenants pay expenses related to occupying buildings, such as utilities and maintenance.

There are many service types, from full-service to triple net, with many formats in between. A full-service lease is generally at the one end. A full-service lease requires that a tenant pay a fixed monthly amount to the landlord to cover their base rent and their pro-rata share in all building operating costs.

A triple net lease is available at the other end.

What is a Triple Net Lease?

A triple net lease, a type of commercial real estate lease, is one in which the tenant pays the landlord a base rent and then pays the operating expenses directly to the utility and service providers. The "N" sign stands for "net" or exclusion of expenses. These include utilities, property taxes, building ins, maintenance and repairs, and insurance.

Triple net leases can be executed by tenants who occupy a whole building. However, they can also be executed in multi-tenant buildings. Triple net leases are typically executed by landlords who have multiple tenants. Tenants pay for their in-suite utilities, such as cleaning and trash collection. They also charge a fixed amount to tenants to cover common costs like taxes, insurance, maintenance, and so on.

A Triple Net Lease: Cautions

There is no standard lease

It is important to remember that there is not a single standard lease in commercial realty. Each lease is negotiated individually to meet the needs of the landlord and tenant as well as the specific conditions of each building. Below is a summary of the triple net lease.

Triple-net leases are available for both multi- and single-tenant buildings

Triple net leases can also be executed in a single-tenant or multi-tenant building. However, in a single-tenant building, the tenant is often responsible for both operational and capital expenses. This includes elements like the roof, HVAC system, parking lot, and roof. If a restaurateur or retailer has a long-term lease on a property, this is often the case. A business can lease space in a property for many decades to build a loyal customer base. The landlord may only pay a base rent.

Tenants who share a building with others tenants are unlikely to make capital expenditures, as their connections to the building and its location might not be as important to their business.

Six key elements of a triple net lease

1. Base rent:

This is the base rent that does not include any additional costs associated with working in a building, such as utilities, maintenance, and taxes. The base rent is usually quoted annually per square foot. For example, a tenant who occupies 2,000 square feet and pays $10/square foot in base rent would pay $20,000 per year.

2. Utilities:

These include electricity, gas, water, and sewer. A triple net lease arrangement is typically offered by landlords. This is due to individual metering being available at the building. The tenant can then pay their utility providers directly. If master-metering is not an option, the landlord will find a way to allocate costs based on each tenant's usage. These formulas or methods should be included in the triple net lease.

3. Cleaning costs:

These include cleaning services such as trash collection, recycling, and vacuuming—both in tenant spaces and common areas. Tenants pay the full cleaning cost for their space. Common areas are cleaned at a pro-rata rate.

4. Real estate taxes:

These taxes are calculated based on the assessed property value and paid approximately once per year. Each tenant pays a pro-rata portion of the building's tax. This means that each tenant pays a percentage of the total tax bill depending on how much space they occupy. For example, if a tenant occupies 20,000 sqft in a 100,000 sqft building, they will be responsible for 20% of the tax bill. Each tenant pays their portion to the landlord, who then pays the entire amount to the municipality.

5. Property insurance:

The landlord holds this insurance to cover claims for building damage, accidents, and other damages. Like real estate taxes, tenants pay a proportion of the total premiums. This is based on how many buildings they occupy. The landlord pays the insurance provider directly. Tenants pay their share of the premiums.

6. Common area maintenance costs:

Also known as CAM, these expenses are incurred in operating and maintaining common areas within a building. This includes lobbies and exercise rooms, bathrooms, shared conference rooms, and elevator lobbies. These expenses typically cover utilities, cleaning, maintenance, and property management. Based on the amount of property leased, each tenant is responsible for a proportionate share of total costs.

What are the Tenant Benefits from a Triple Net Lease

Each tenant pays their fair share

The tenant who incurred the expenses pays them directly, not a sum divided among all tenants. A light user of utilities will not be liable for expenses incurred by heavy users who share the property.

Transparency

Ask for statements that detail several years of operating expenses for your building. You will be able to budget for utilities, insurance, and common areas if you know the costs. Ask about any planned non-capital expenditures that the landlord may be making. Capital expenses are the landlord's responsibility and can not be passed on to tenants. Additional maintenance costs can be passed on to tenants, such as deep cleaning common areas and resurfacing parking lots.

Lower than market rents

You may be able to pay lower rents than a user who has a full-service contract for the same property.

What are the Tenant Risks in a Triple Net Lease

Direct expenses

Tenants who spend more on utilities than they anticipated will be charged more to occupy the space. If costs rise, the landlord who has set fixed expenses will take on the risk with a full-service lease.

Shared expenses

Insurance premiums, property taxes, and common area maintenance fees are generally out of the tenant's control. However, the tenant could be responsible for any increase in these expenses due to, for instance, an increase in the building's value, an accident at it, or the need to make emergency repairs to the elevator.