If you are considering a commercial lease for your business, you’ll likely hear the terms “net lease” or “triple-net lease.” Despite the complex-sounding name, triple-net leases are one of the most popular types of commercial leases. However, as the details of triple-net leases vary by contract, it’s vital to understand what type of agreement you’re signing.
This article will help you understand triple-net leases, as well as the top five things you should know before entering a triple-net lease to ensure that it is appropriately structured for your business goals.
What is a Triple-Net Lease (NNN)?
A Triple-Net Lease, or NNN lease, is a type of commercial real estate lease commonly used for restaurant or retail franchises in the United States. It offers a structure that allows franchisees to have more control over their space while taking on additional financial responsibilities.
Under a triple-net lease, as a franchisee, you would assume the responsibility for paying not only the base rent but also the net expenses associated with the property. These expenses typically include three main costs: net real estate taxes, net building insurance, and net common area maintenance (CAM) charges. This arrangement is often referred to as “triple-net” because it involves three significant expenses. Here’s how these expenses break down:
1. Net Real Estate Taxes: As the franchisee, you would be responsible for paying your share of the property’s real estate taxes. These taxes are assessed by local government authorities and contribute to the overall cost of operating the property.
2. Net Building Insurance: It would be your responsibility to obtain and maintain insurance coverage for the leased property. This insurance policy should cover the building’s structure itself. By assuming this responsibility, you have more control over the insurance coverage and can choose a policy that meets your specific needs.
3. Net Common Area Maintenance (CAM) Charges: Common area maintenance expenses, such as parking lot maintenance, landscaping, and security, would be your responsibility as the tenant. These costs are typically estimated and billed periodically by the landlord. Taking on these expenses allows you to ensure that the common areas surrounding your franchise location are well-maintained and present a positive image to your customers.
It’s important to carefully review the terms and details of the triple-net lease agreement as they can vary. The lease document should clearly outline how these expenses are allocated and provide transparency regarding your financial obligations.
Triple-net leases are often attractive to restaurant and retail franchises because they provide more autonomy and control over the leased space. However, it’s crucial to assess and consider the potential costs and risks associated with assuming these additional financial responsibilities.
How is a Triple-Net Lease (NNN) Different than a Gross Lease?
To understand how a triple-net (NNN) lease works, you should first understand gross leases. You pay a fixed rental amount with a gross lease, just as in a typical residential lease. But unlike a gross lease, a triple-net lease requires you to pay additional costs on top of a base rent amount. A Triple-Net Lease (NNN lease) and a Gross Lease are two different types of commercial real estate lease structures. Here is a breakdown of the 3 main ways these 2 types of lease differ:
Expense Responsibility: The key distinction between a triple-net lease and a gross lease lies in the allocation of expenses.
•NNN Lease: In a triple-net lease, the tenant assumes responsibility for the net expenses associated with the property, including real estate taxes, building insurance, and common area maintenance (CAM) charges. These expenses are paid in addition to the base rent, and the tenant typically handles them directly.
•Gross Lease: In a gross lease, the landlord agrees to bear the operating expenses of the property. The tenant pays a fixed, all-inclusive rent amount, and the landlord takes care of real estate taxes, building insurance, CAM charges, and other operating costs. The tenant’s rent amount remains consistent throughout the lease term.
Rent Structure: The rent structure in these lease types also differs:
•NNN Lease: In an NNN lease, the base rent is usually lower compared to a gross lease since the tenant assumes the responsibility for additional expenses. The tenant pays the base rent along with the net expenses, making the total monthly or annual cost higher than the base rent alone.
•Gross Lease: In a gross lease, the rent amount agreed upon with the landlord includes all the operating expenses. The tenant pays a fixed amount that encompasses the costs of real estate taxes, building insurance, CAM charges, and other applicable expenses. This allows for easier budgeting and predictable monthly costs for the tenant.
Control and Autonomy: The lease structure impacts the level of control and autonomy the tenant has over the property:
•NNN Lease: With a triple-net lease, the tenant has more control over the property’s maintenance, insurance coverage, and management. Since the tenant directly handles the expenses, they can choose the insurance policy, control the maintenance quality, and have more influence over the property’s operations.
In summary, in a triple-net lease, the tenant takes on the financial burden of property expenses, allowing for more control and customization. In contrast, a gross lease provides a more simplified payment structure, with the landlord assuming the operating expenses, offering convenience and potentially easier budgeting for the tenant.
Benefits of a Triple-Net Lease
A triple-net lease provides excellent benefits for the right tenant. A primary reason to choose a triple-net lease is to retain control over certain costs associated with the property. Also, the base rent is typically lower than a gross lease, and you may be able to reduce that number during negotiations. Finally, the triple-net lease structure allows you to choose where you would like to save money and what expenses are worth the splurge.
Another benefit of triple-net leases is the potential to customize the property with cosmetic upgrades. Some property owners even encourage modifications by offering credits or reduced base rent for your improvements. This arrangement lets you control the amount invested in upgrades while also allowing you to supervise the work and ensure quality control.
Why Are NNN Leases So Common?
The reason triple-net leases are so standard is that landlords and investors find them to be a solid lease structure besides being beneficial for tenants.
These leases attract landlords as they require little involvement to manage, saving both time and costs for manager salaries. In addition, as landlords are not paying most of the monthly operating and maintenance expenses, they do not need to maintain as high of a cash balance.
Landlords also prefer triple-net leases because of the reliable revenue. In addition, the mutually beneficial nature of these leases makes them the perfect solution for landlords looking for an easy management model and tenants looking for control over costs.
What Does the Landlord Pay Under a NNN Lease?
The primary financial responsibility of the landlord in a triple-net lease is to pay the mortgage. However, conditional upon the lease terms, some landlords may also pay for some types of repairs, usually significant structural improvements.
They may also pay for some portion of the property insurance. Legal fees and accounting fees are typically not covered under a triple-net lease, so these are paid by the respective parties incurring the services.
Costs Can Vary From Year to Year Under a Triple Net Lease
In general, NNN in a commercial lease agreement stands for triple-net, or net of taxes, insurance, and maintenance. Still, it is crucial to dive into the lease agreement and understand exactly what each term is to ensure you have a comprehensive financial picture and budget accordingly.
The NNN variable expenses can change yearly, so always inquire about estimated and historical NNN charges. It’s also important to confirm details regarding specific terms within your triple-net lease agreement. For example, some triple-net leases have built-in rent increases, so plan for this in advance.
Another term to note is overhead expenses. Find out if overhead fees are prorated between tenants based on occupied or total space. If there are vacancies in the property, this could lead to a considerable variation in your calculation.
If you’re looking for a flexible and customizable commercial lease structure that allows you to retain control over expenses, you might want to consider a triple-net lease. While expectations and responsibilities vary from lease to lease, you can avoid pitfalls by ensuring that terms are clearly defined and any gray areas are cleared up before acceptance.
Simplify Lease and Location Management
Entering a triple-net lease is an exciting stage of running a business, although the numerous items that need to be tracked may have you feeling like you are drowning in details.
Leasecake was designed to solve just that problem. By storing lease data and related documents, as well as sending reminders about critical dates, Leasecake helps manage your leases and comply with ASC 842 standards.
Schedule a free consultation to see if Leasecake is the right fit for your business, and we’ll review your lease management needs.