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 covers the top five things you should know before entering a triple-net lease to ensure you enter an appropriately structured contract for your business goals.
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.
Property taxes, insurance, and maintenance expenses fall on the tenant in a triple-net lease. The maintenance costs can include fees for janitors, electricity, water, gas, internet, phone, additional utilities, repairs, landscaping, and more. Therefore, before entering a triple-net lease, you must study the lease to know what costs are your responsibility.
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.
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.
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.
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.
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
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