There are a few types of leases that commercial tenants might enter into with their landlord. The triple net lease, aka NNN, is one of the more common types. Under a triple net lease, the tenant will pay rent, as well as their share of building maintenance, insurance, and property taxes. Usually the rent is calculated by the square footage of the space leased, and the NNN payments are calculated by the percentage of the square footage the tenant is using out of the entire complex. For example, if the tenant uses 30% of the total square footage, their share of the NNN expenses will be 30%.
For landlords this lease form is advantageous because it requires the tenant to cover additional costs and allows them to charge a lower rent payment since the additional costs are covered. With lower rent payments the landlord may have better luck keeping their spaces occupied with tenants.
For tenants the lower rent payments under a triple net lease may be helpful to their bottom line. However, prospective tenants need to remember that the other costs can add up and quickly make this attractive option a nightmare. The tenant should consider the following when deciding whether a triple net lease is right for their business:
1. Insurance. The landlord may have insurance that the tenant pays, or the tenant may purchase their own insurance depending on the terms of the lease. In either case, insurance can be a fluctuating cost and if one party fails to carry it the other may find themselves in an expensive situation if something happened to the property. A tenant will need to decide if their business can afford this fluctuating expense.
2. Common Area Maintenance (CAM). Maintenance is another fluctuating expense. If the property is in good condition, then there will typically be less maintenance and lower costs. If the property is in poor condition the tenant will be footing at least some of the bill for maintenance if they want to ensure the property is welcoming for their customers. If the other spaces are empty, the tenant may find a landlord is hesitant to keep up with the maintenance because they have to pay some of the bill.
3. Property Taxes. As part of the lease agreement the tenant will pay a certain amount per month towards the estimated tax bill for the year. This amount may change from year to year depending on property values. For example, in Austin property values have risen dramatically over the last few years resulting in much higher tax payments for many commercial tenants. It is also important to remember that the monthly amount is simply an estimate. If the actual tax bill varies significantly, the tenant may be entitled to money back or may have to pay a big payment out of pocket. Typically, within a reasonable time after the end of each year the landlord is supposed to reconcile all the costs and collect or refund the balance as appropriate.
Ultimately, triple net leases can be valuable for both the tenant and the landlord as long as both parties consider the possible pitfalls and determine what makes the most sense for their business model.