If you plan on leasing a commercial property, you may have heard the terms “triple-net lease” and “NNN lease.” These are interchangeable terms that refer to a specific type of lease that is popular among both commercial landlords and their tenants. However, this type of lease has a unique structure and specific terms that can have a significant impact on a tenant’s finances. Before signing anything, it’s important to know exactly which rights and responsibilities you have under an NNN lease.
Costs Associated with NNN Leases
Perhaps the largest difference between triple-net leases and gross leases is how costs are split between the landlord and tenant. When a tenant is on an NNN lease, they are responsible for three types of expenses in addition to their base rent. The first expense is their share of property taxes. This may be a negligible amount for a small property or a property in a low-cost-of-living area, or a massive monthly expense for a large building or expensive area.
It’s important to know how property taxes have fluctuated over the years and what you’re likely to be on the hook for. The second expense is building insurance. Again, insurance costs vary quite a bit between different types of buildings, the environmental risks in your geographic area, and the safety features included in the building. The benefit is that you, as the person actually using the property, can decide how much insurance you need and which additional protections you need.
Finally, the tenant is responsible for their share of common area maintenance expenses. These are often split between all of the tenants that share these common areas, and the actual monthly expenses depend a lot on which amenities you have and how they are maintained. Expenses in this category may include landscaping, security, parking lot maintenance, surveillance fees, and cleaning.
Differences Between Triple-Net and Gross Leases
The difference in cost responsibility is the single biggest difference separating triple-net and gross leases. The total amount, however, may not end up being that different. When a landlord is responsible for common area maintenance, property taxes, and insurance, they simply roll those costs into the monthly rent. That means that whether those expenses go up or down, you continue to pay the same amount. However, you also have no control over those expenses, nor the freedom to decrease them and save yourself money.
This leads to another key difference: rent stability. This is a major selling point for some business owners, as the fluctuations of an NNN lease may cause them significant financial stress or make it difficult to budget.
Tenant control is another significant difference between gross and triple-net leases. Triple-net leases give tenants significantly more control over the type and amount of insurance they carry, how they maintain common areas, and which amenities they want to contribute to as the property evolves over time.
Why a Triple-Net Lease May Benefit You
Triple-net leases are beneficial to tenants in several ways. If you are excellent at saving money and finding cost-cutting measures, you may enjoy the control and flexibility you get with a triple-net lease. When a landlord knows they can just roll these expenses into the rent amount, they aren’t quite as invested in finding lower-cost options. There may also be tax benefits that come with triple-net leases, depending on your business structure and specific jurisdiction.
Those who prefer complete transparency in their business transactions often opt for triple-net leases. Gross leases tend not to be quite as clear in what you’re paying for as a tenant, so you really don’t know how much value you’re actually getting from what your landlord is charging you. With a triple-net lease, you see exactly where your money is going.
Downsides of NNN Leases
Although there are numerous benefits, NNN leases also come with some drawbacks. As a tenant, you bear the full risk of insurance premium increases, sudden increases in the cost of maintaining common areas, and other expenses. This may be a major issue if you run on a small profit margin. Property management also takes significant time and resources, which can be a disadvantage for some busy business owners.
When looking for the right space for your commercial endeavors, weigh your lease options carefully and keep these factors in mind.