In the commercial real estate environment, the phrase Triple Net Lease (“NNN lease”) is widely used. What exactly is a triple net (NNN) lease? Why is it so prevalent? Does it benefit the renter or the landlord?
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What is a Triple Net Lease (NNN)?
A Triple Net (NNN) Lease is a commercial lease arrangement in which the tenant agrees to pay a basic rental sum as well as the net amount of the landlord’s real estate taxes, building insurance, and common area maintenance charges. In practise, practically all NNN leases vary significantly in appearance and assign obligations between landlord and tenant in slightly different ways. Because of the differences, it is critical that a renter carefully read the NNN lease presented by a possible landlord.
Is a Triple Net (NNN) Lease Beneficial to the Tenant or the Landlord?
Almost all responsibility lie on the tenant rather than the landlord under a NNN lease agreement. The renter will be liable for both rent and the landlord’s direct costs involved with owning the property (taxes, insurance, operating expenses, utilities, etc.).
If you believe this is highly advantageous to the landlord, you are correct! So, what makes a renter agree to this? The capacity of the tenant to negotiate around a NNN lease is often restricted by the geographic region. It is normal practise in many locations to demand a NNN lease if a renter want to lease commercial property. NNN leases may be less popular in other places, particularly in smaller cities.
Is this to say that a renter has no leverage to negotiate better terms? Certainly not! A tenant may negotiate a NNN lease in a variety of ways to make it more advantageous.
First, the basic rental amount becomes an important negotiation point. If the renter assumes full responsibility and risk for the landlord’s overhead, the tenant may be able to negotiate a lower base rate.
Second, the specific goods included as part of the overhead in NNN leases might vary. Tenants often bargain that the landlord bears the cost of certain repairs and/or utilities.
Why are Triple Net Leases (NNN) so popular?
NNN leases are preferred by landlords because they eliminate some of the uncertain financial risk associated with commercial property. If the cost of taxes or insurance rises, or if unforeseen maintenance requirements arise, the renter is obligated to shoulder the increased cost. This is beneficial to landlords and particularly beneficial to investors.
What Should a Tenant Keep an Eye Out For?
If overhead (taxes, insurance, maintenance, etc.) is prorated between numerous renters, the computation must be scrutinised. Is the proration determined by leasable or occupied space? The latter might be disastrous for a renter. For example, if five tenants in a five-unit commercial building share the overhead evenly, everything is good until three tenants leave, leaving just two apartments occupied. If taxes, insurance, maintenance, and utilities are prorated depending on the amount of space occupied, the two remaining renters must now divide everything 50/50. That’s not good!
If overhead is prorated based on leasable space, it is critical for a tenant to understand the meaning of “leasable space” — does it include space that is available but has not yet been built out? As a tenant, you should ensure that it encompasses the whole building, regardless of the state or purpose of the landlord to use other parts of the structure.