What Does ‘NNN Lease / Triple Net Lease’ Mean?
Commercial Real Estate Leases and Clauses
There are many forms of commercial real estate leases, due to the fact that there is not a universal lease template or standard at any state or national level. Unless you are dealing with the same landlord on the same property, the odds of someone seeing a lease agreement that is even relatively similar to a prior lease agreement is very rare.
For example, in terms of the length of a lease document, you may see a lease agreement that is 15 pages long on one property and a similar property nearby with a different owner could present a lease that is 85 pages long. You might think a 15-page lease agreement is better because you can read it faster, but it could be missing many key deal points that are meant to protect the tenant as well.
Simply put, there is no standard or perfect lease length and nearly every lease agreement will be heavily drafted in favor of the landlord. Since evaluating leases can be daunting even for seasoned professionals who have had multiple leases and locations, the best thing you can do to prepare yourself is to understand the different types of lease structures along with the benefits and obligations that accompany them.
To put this in perspective, in residential real estate, most states have an industry recognized template for purchase contracts that nearly every agent or broker uses when buying or selling real estate in that state. Since this is clearly not the case for commercial real estate, it is vitally important that you understand the terminology and variations in lease structures so you can be better equipped to choose the right property for your office space as well as the right terms.
First and foremost, you should always hire a qualified real estate attorney to represent you in any lease or purchase review. If you are signing a legally binding document that is drafted by an opposing party, it needs to be properly reviewed.
Prior to agreeing on terms for a deal and moving forward to a draft lease, it’s important to understand the different types of lease structures and clauses. Those clauses affect how much you are going to pay in rent and what other obligations or expenses get charged to you in the future. Understanding this will help you properly evaluate all your options so you can confidently move forward with one space in particular.
WHAT IS A NNN LEASE / TRIPLE NET LEASE?
A Triple Net Lease or NNN Lease is one of the most common lease structures in Commercial Real Estate. In addition to the tenant’s base rent, a Triple Net Lease contains a provision for the tenant to pay certain costs associated with operating the property. Those costs are outlined in three “Nets”.
Each “N” or “Net” stands for;
N = Property Taxes
N = Insurance
N = Operating Expenses
Operating Expenses are often also referred to as CAM – Common Area Maintenance and are the expenses it takes to run the property. Those expenses include repairs and maintenance, trash removal, snow removal, landscaping, parking lot maintenance, property management, exterior lighting and more.
Depending on the property, utilities and janitorial may also be included in the Operating Expenses or CAM. With a Triple Net Lease, you typically pay the landlord one check per month, but that check is broken down into two main categories:
- The Base Rent Amount
- The Triple Net Amount (or NNN)
For example, if you leased a 2,000 SF space with a $24 per SF Base Rent and $8 per SF Triple Net, the breakdown of payments would be:
- Base Rent: 2,000 SF x $24 per SF = $48,000 per year or $4,000 per month
- Triple Net: 2,000 SF x $8 per SF = $16,000 per year or $1,333 per month
Total rent would be $5,333 per month; with the Triple Net being $1,333 per month.
Triple Net leases are the most common type of lease you will find in Retail Properties, newer Medical Buildings and the majority of Office Buildings. The next most common lease is a Full Service Lease, followed by Gross Leases and Modified Gross Leases.
In most states, the rent is calculated on a per square foot per year cost. However, states like California charge rent on a per square foot per month cost. So $24 per SF per year in Florida is the equivalent of $2 per SF per month in California.
In part 2 of this series we will cover Full Service Leases. Beyond that, there are additional types of leases such as Gross Leases and Modified Gross Leases, as well as dozens of additional lease terms. This terminology is important to understand as you evaluate real estate opportunities for your practice. Understanding each term will further equip you to make the most informed decision benefiting your practice.
To review additional commercial real estate terminology, click here.
For answers to frequently asked questions about commercial real estate, click here.