by Mike Migone, CCIM | June 26, 2017
Though very popular with landlords, the triple net lease structure is still misunderstood by many. You may ask, ‘what exactly is a triple net, or NNN, lease’? As the most popular type of net lease for commercial freestanding buildings and retail space, it’s important to know the details and consider if a NNN lease is right for you and your business. The definitions vary (more on that later), but here’s a basic explanation of a NNN lease:
A Triple Net (NNN) Lease is a lease structure where the tenant is responsible for either paying or reimbursing the landlord for operating expenses associated with a property.
As a Senior Investment Advisor with 31 years of experience, I always recommend to clients looking to lease to start with a basic questionnaire:
- Is the building newer (e.g. 5 years or younger)?
- If not, is the building in good repair?
- Is the lease structure flexible?
If you said yes to the first two questions, a NNN lease may not be a bad option.
Under this lease type structure, there is more financial transparency, because the tenant will know operating expenses in relation to the rent they’re paying. Though the landlord may pay certain expenses (i.e. real estate taxes, property insurance, and common area maintenance) the tenant will reimburse the landlord as additional rent above their scheduled base rent. This additional rent is sometimes referenced as a ‘CAM fee’ or ‘Pass Thru’ expense.
As you can probably infer, the NNN lease favors the landlord, because it places more responsibility on the tenant.
Add to your questionnaire more nitty-gritty details, like “What’s the condition of the roof? Air-conditioning? Plumbing, electrical?” If the condition of any of these key items is not ideal, it’s time to negotiate. For example, if the building has an 8 year-old air conditioning system, you can negotiate a clause that only has you, ‘tenant’, responsible for only the functional remaining life of said AC unit. These types of negotiations can be applied to all structural and mechanical components, as well.
Remember how I used that sticky phrase earlier, a NNN lease definition ‘varies’? Depending on your location, NNN may be defined as the landlord having responsibility for roof, structure and parking lot. In this case, you will often see a reserve for these expenses taken out of the net income.
Other times, the tenant is responsible. This is an example of an Absolute Triple Net Lease, which is the second main type of NNN lease. Under this structure, the tenant is responsible for all expenses including roof, structure and parking lot.
SVN Commercial Advisory Group understands that the significance of how a lease type can have a lasting financial impact on your company, and we want to protect your investments. Before you sign the dotted line, remember that lease terms are often negotiable. Consulting a professional advisor can help you navigate the tricky waters of lease negotiation and can save you hassle, time and money.