Triple Net Leases
Also referred to as NNN leases, the triple net lease is more common in commercial real estate than the residential market. It's an arrangement that places a good deal of financial burden on the tenant, so it's important for renters to understand the commitment they're making with this type of contract.
Common Lease Types
Whether it's a warehouse or a home, there are three basic types of leases that are negotiated with a landlord:
- Gross Lease: the tenant pays a flat monthly payment; the landlord is responsible for paying all the operating costs, including property taxes, homeowners insurance or property insurance, and utilities.
- Percentage Lease: more common in commercial real estate markets where there is a charge for rent, operating expenses, maintenance of common areas, and even a share of the gross revenues generated; this last fee is commonly found in shopping malls.
- Triple Net Lease: the tenant pays a base rent, taxes, insurance, and also any charges for repairs and maintenance of the property.
No doubt there are countless combinations of the above types of leases. At the one extreme is the gross lease, in which the landlord is responsible for maintaining and running the property. At the other end of the spectrum are triple net leases, which place most of the financial burden of maintaining and operating the property on the shoulders of the tenant.
A good example of the variation found in this marketplace is the double net lease. With this type of arrangement, the landlord / lessor takes responsibility for maintaining the roof and structure. Money set aside for this expense is termed a "reserve."
Advantages of a Triple Net Lease
Depending on the role as a lessee or lessor in a triple net lease, the perspective on the advantages and disadvantages will be different. The tenant is responsible for property taxes, insurance, and maintenance. This places a burden on the tenant, so most of the advantages flow to the owner / lessor.
Any increase in property tax is passed directly to the tenant. In fact, some property owners fail to challenge increases to property tax based on the assumption these costs will be passed on to future tenants.
This works well until the lessee moves out; at that point, the owner is stuck paying the higher tax bill until another tenant can be found. Landlords must be careful these increases do not put their property at a competitive disadvantage to nearby properties.
A second advantage of the triple net lease is the tenet is responsible for payment of property insurance. This is an ideal situation as long as there is adequate insurance on the property itself, and the tenant is not experiencing any financial difficulties.
At the extreme, there are circumstances where the tenant could be driven to measures such as willful damage to the property, with the hope of collecting money via an insurance claim. If such an insurance claim was denied, and the tenant went bankrupt, the landlord would be responsible for all payments necessary to restore the property.
One variation on the triple net lease is called the bondable lease. In this arrangement, the tenant carries casualty insurance in addition to property insurance.
Best Lease Arrangement
There really is no right answer to the question: What is the best lease arrangement? That's because the answer is really: It depends.
The only way to make a fair comparison is by figuring out what the total cost will be under varying arrangements. When evaluating a triple net lease, the potential tenant will need to know the property taxes, utilities, and repairs to develop an accurate estimate of their monthly costs.
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