What Tenants Should Know About The Triple Net Lease
If you have been around the commercial real estate scene for a while, chances are that you have heard about triple net leases. If you just have a vague idea of what it means, by the time you are done reading this post, you should know your way around a triple net lease.
What is a Triple Net (NNN) LeaseA triple net lease is a commercial lease agreement where the tenant chooses to make three payments in addition to the base rental amount. These include the net amount of the landlord's real estate taxes, the net amount of building insurance, and the net amount for maintenance expenses.
In practice, the features of a triple net lease differ with each agreement. Some agreements allocate responsibilities differently between the landlord and the tenant. So, make sure you look through your triple net lease before putting pen to paper. It is advisable that you have a lawyer look through the lease agreement for you. Read our blog on How to Negotiate a Favorable Commercial Lease Agreement.
Who Does A Triple Net Lease Favor? The Landlord Or The Tenant?With a Triple Net lease, the bulk of the responsibility falls on the tenant as opposed to the landlord. The tenant has to pay rent, and cover other overhead expenses (taxes, utilities, insurance, and operating expenses).
If you are wondering if this is unfavorable to the tenant, you are right, it is unfavorable. So, why would a tenant sign such an unfavorable agreement?
One major reason for this is geography. In some prime commercial locations, all landlords require tenants to sign Triple Net Leases. So, if a tenant wants to do business in that area, there is no choice but to comply with this requirement.
However, this does not mean there is no room for negotiation when it comes to multiple lease agreements.
One possible area of negotiation is the base rental amount. Since you are taking care of overhead expenses, you can negotiate a favorable base rental amount.
Another area of negotiation is the responsibility for some overhead expenses. You can negotiate with your landlord that he would be responsible for some maintenance costs and/or utilities.
Why Are Triple Net Leases Common?Landlords like Triple Net Leases because it takes away some of the uncertainty associated with commercial real estate. If there is an increase in property taxes, insurance premiums, or unexpected maintenance costs, the tenant will take care of it.
What You Should Watch Out For In A Triple Net LeaseIf the overhead costs are prorated among multiple tenants, then you need to take a close look at the calculation. Is the proration based on leasable space or occupied space?
For instance, if there were five tenants and three of them leave, would the remaining two tenants cover the costs for the three remaining tenants? It the agreement says that is what would happen, then you should go elsewhere or negotiate for better conditions.
Trying to look through a Triple Net Lease on your own can be quite risky. There could be unfavorable conditions hidden deep in the fine print. With an experienced commercial lawyer, you would have an experienced pair of eyes looking through the agreement for you.